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Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007

Listed author(s):
  • Ohanian, Lee E.

    (Stanford University)

  • Restrepo-Echavarria, Paulina

    ()

    (Federal Reserve Bank of St. Louis)

  • Wright, Mark L. J.

    ()

    (Federal Reserve Bank of Chicago)

After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets – rather than domestic or international capital markets – account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while their removal accounts for much of Asia’s growth.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2014-38.

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Length: 113 pages
Date of creation: 25 Nov 2013
Date of revision: 04 Nov 2015
Handle: RePEc:fip:fedlwp:2014-038
DOI: 10.20955/wp.2014.038
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