50 Years of Capital Flows

Does capital flow to locations with a relatively high rate of return? We address this question by constructing a panel database of over 100 countries between 1950 and 2005, accounting for about 99 percent of world real income in 2005. With these data, we construct two measures of the rate of return in an economy. The first measure is from the production side of the economy using the marginal product of capital. The second measure is from the household side of the economy using the consumer's intertemporal marginal rate of substitution. Our main finding is that for much of the last half century, capital has not flowed from low return to high return countries, with returns measured either using the MPK or the IMRS. This finding holds at the individual country level, and also holds for various levels of aggregation of countries. Specifically, Latin America received significantly more international capital, and the Asian tigers much less capital, than is consistent with standard theory.