Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation

Sebnem Kalemli-Ozcan (), Laura Alfaro () and Vadym Volosovych ()

No 2003-01, Working Papers from Department of Economics, University of Houston

Abstract: We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries - the "Lucas Paradox." The theoretical explanations include differences in fun- damentals across countries and capital market imperfections. We show that during 1970-2000 low institutional quality is the leading explanation. For example, improving Peru's institutional quality to Australia's level, implies a quadrupling of foreign investment. Recent studies em- phasize the role of institutions for achieving higher levels of income, but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.

Keywords: capital inflows; fundamentals; institutions; international capital market imperfections; neoclassical model (search for similar items in EconPapers)
JEL-codes: F21 F41 O1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-bec and nep-dev
Date: Written
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Related works:
Working Paper: Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation (2005)
Working Paper: Why doesn't capital flow from rich to poor countries? An empirical investigation (2004)
Journal Article: Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation (2008)
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