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

Listed author(s):
  • Paulina Restrepo-Echavarria

    (Federal Reserve Bank of St Louis and The)

  • Mark Wright

    (Federal Reserve Bank of Chicago)

  • Lee Ohanian

    (University of California Los Angeles)

Theory predicts that capital should flow to countries where economic growth and the return to capital is highest. However, in the post-World War II period, per-capita GDP grew almost three times faster in East Asia than in Latin America, yet capital flowed in greater quantities into Latin America. In this paper we propose a 3-country 2-sector growth model, augmented by 'wedges' to quantify and evaluate the importance of international capital market imperfections versus domestic imperfections in explaining this anomalous behavior of capital flows. We find that during the 1950's capital controls where important, but domestic conditions dominate. And contrary to what has been thought, after 1960 capital controls in Asia encouraged borrowing.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_1377.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1377.

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Date of creation: 2015
Handle: RePEc:red:sed015:1377
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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