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Serial default and the “paradox” of rich to poor capital flows

  • Reinhart, Carmen
  • Rogoff, Kenneth

Lucas (1990) argued that it was a paradox that more capital does not flow from rich countries to poor countries. He rejected the standard explanation of expropriation risk and argued that paucity of capital flows to poor countries must instead be rooted in externalities in human capital formation favoring further investment in already capital rich countries. In this paper, we review the various explanations offered for this “paradox.” There is no doubt that there are many reasons why capital does not flow from rich to poor nations – yet the evidence we present suggests some explanations are more relevant than others. In particular, as long as the odds of non repayment are as high as 65 percent for some low income countries, credit risk seems like a far more compelling reason for the paucity of rich-poor capital flows. The true paradox may not be that too little capital flows from the wealthy to the poor nations, but that too much capital (especially debt) is channeled to “debt intolerant” serial defaulters.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13997.

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Date of creation: May 2004
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Handle: RePEc:pra:mprapa:13997
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  1. repec:rus:hseeco:123922 is not listed on IDEAS
  2. Andrei Shleifer, 2003. "Will The Sovereign Debt Market Survive?," Harvard Institute of Economic Research Working Papers 2000, Harvard - Institute of Economic Research.
  3. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  4. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2005. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," NBER Working Papers 11901, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  6. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  7. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  8. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
  9. Lane Philip R., 2004. "Empirical Perspectives on Long-Term External Debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-23, January.
  10. Mark Gertler & Kenneth Rogoff, 1989. "Developing country borrowing and domestic wealth," Proceedings, Federal Reserve Bank of San Francisco.
  11. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  12. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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