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Why are poor countries poor?

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  • Daniel Cohen; Marcelo Soto

Abstract

We attempt to explain why standard explanations of the poverty of nations are unsatisfactory. We first argue that human capital is low in poor countries because its production has increasing returns with respect to life expectancy. We then show that the reason why capital does not flow to poor countries (the Lucas paradox) can readily be explained once market prices rather than PPP prices are used to assess the return to physical capital: the return to capital in poor countries is not higher than in the rich world in spite of its relative scarcity. We finally argue that PPP calculations bias downwards the measured TFP of poor countries, which may in part explain their lower productivity. The message of hope is that education can shoot up as life expectancy increases. A higher level of human capital would appreciate the real exchange rate through a Balassa-Samuelson effect, thus raising the profitability physical capital. This in turn would encourage foreign capital to flow to developing countries

Suggested Citation

  • Daniel Cohen; Marcelo Soto, 2004. "Why are poor countries poor?," Econometric Society 2004 Latin American Meetings 75, Econometric Society.
  • Handle: RePEc:ecm:latm04:75
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    References listed on IDEAS

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    1. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    2. Coe, David T & Helpman, Elhanan & Hoffmaister, Alexander W, 1997. "North-South R&D Spillovers," Economic Journal, Royal Economic Society, vol. 107(440), pages 134-149, January.
    3. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
    4. Mikael Lindahl & Alan B. Krueger, 2001. "Education for Growth: Why and for Whom?," Journal of Economic Literature, American Economic Association, pages 1101-1136.
    5. Devarajan, Shantayanan & Easterley, William R. & Pack, Howard, 2001. "Is investment in Africa too low or too high : macro and micro evidence," Policy Research Working Paper Series 2519, The World Bank.
    6. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, pages 64-111.
    7. Daron Acemoglu & Fabrizio Zilibotti, 2001. "Productivity Differences," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 563-606.
    8. Daniel Cohen & Marcelo Soto, 2007. "Growth and human capital: good data, good results," Journal of Economic Growth, Springer, vol. 12(1), pages 51-76, March.
    9. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
    10. Alwyn Young, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 641-680.
    11. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
    12. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
    13. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Citations

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    Cited by:

    1. Bazillier, Remi, 2008. "Core Labor Standards and Development: Impact on Long-Term Income," World Development, Elsevier, pages 17-38.
    2. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
    3. Graham Bird, 2004. "Growth, poverty and the IMF," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 621-636.
    4. Cohen, Daniel & Leker, Laura, 2014. "Health and Education: Another Look with the Proper Data," CEPR Discussion Papers 9940, C.E.P.R. Discussion Papers.
    5. Cohen, D. & Leker, L., 2016. "Testing the Ben-Porath effect through the educational patterns of young cohorts," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 252-262.
    6. Causa, Orsetta & Cohen, Daniel, 2006. "Industrial Productivity in 51 Countries, Rich and Poor," CEPR Discussion Papers 5549, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Human capital; capital flows; Lucas Paradox;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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