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Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation*

* This paper has been replicated

Author

Listed:
  • Laura Alfaro

    (Harvard Business School, Business, Government, and the International Economy Unit)

  • Sebnem Kalemli-Ozcan

    (University of Houston, Department of Economics, and NBER)

  • Vadym Volosovych

    (Florida Atlantic University, Department of Economics)

Abstract

We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries-the "Lucas Paradox." The theoretical explanations include cross-country differences in fundamentals affecting productivity, and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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  • Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2008. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 347-368, May.
    • Handle: RePEc:tpr:restat:v:90:y:2008:i:2:p:347-368
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    Replication

    This item has been replicated by:
  • Muhammad Akhtaruzzaman & Christopher Hajzler & P. Dorian Owen, 2018. "Does institutional quality resolve the Lucas Paradox?," Applied Economics, Taylor & Francis Journals, vol. 50(5), pages 455-474, January.

    • More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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