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Do Rich Countries Invest Less in Poor Countries than the Poor Countries Themselves?


  • Michael Clemens



Global private capital flows have barely touched the poorest nations; the rich invest mostly with the rich. Confronted with this wealth bias in cross-border investment flows, one of the starkest facts of the global economy, theorists and empiricists have spent roughly the last decade looking for an explanation. It is possible that failures in the global capital market prevent capital from exploiting high returns in poor countries; it is also possible that fundamental returns to investment are lower in poor countries. Could a rich-country social planner, capable only of forcing capital flows across borders but not directly into the hands of individual poor-country entrepreneurs, improve the efficiency of the global capital allocation? She could—but only to the extent that market failures cause wealth bias, and moreover, only to the extent that those market failures drive wedges expressly across international boundaries. A novel empirical framework uses standard data to conclude that 85% of wealth bias, whether caused by market failure or not, is domestic in origin. That is, poor country lenders are deterred from investing in poor countries to nearly the same degree that rich-country lenders are. Schematically speaking, investors at the National Stock Exchange in Mumbai face much the same incentives to invest in India as do their counterparts on Wall Street.

Suggested Citation

  • Michael Clemens, 2002. "Do Rich Countries Invest Less in Poor Countries than the Poor Countries Themselves?," Working Papers 19, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:19

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    References listed on IDEAS

    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
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    Cited by:

    1. Hiroyuki Hino & Atsushi Iimi, 2008. "Aid Effectiveness Revisited: Comparative Studies of Modalities of Aid to Asia and Africa," Discussion Paper Series 218, Research Institute for Economics & Business Administration, Kobe University.

    More about this item


    private capital; poverty; global economy; wealth bias;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets


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