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Capital Flows to Developing Countries: The Allocation Puzzle

  • Pierre-Olivier Gourinchas
  • Olivier Jeanne

According to the consensus view in growth and development economics, cross country differences in per-capita income largely reflect differences in countries' total factor productivity. We argue that this view has powerful implications for patterns of capital flows: everything else equal, countries with faster productivity growth should invest more, and attract more foreign capital. We then show that the pattern of net capital flows across developing countries is not consistent with this prediction. If anything, capital seems to flow more to countries that invest and grow less. We argue that this result -- which we call the allocation puzzle -- constitutes an important challenge for economic research, and discuss some possible research avenues to solve the puzzle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13602.

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Date of creation: Nov 2007
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Publication status: published as Review of Economic Studies (2013) doi: 10.1093/restud/rdt004 First published online: January 22, 2013
Handle: RePEc:nbr:nberwo:13602
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