Serial Default and the "Paradox" of Rich to Poor Capital Flows

Carmen Reinhart () and Kenneth S Rogoff

No 10296, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: F21 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-lam and nep-rmg
Date: Written 2004-02
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Published as Reinhart, Carmen M. and Kenneth S. Rogoff. "Serial Default And The 'Paradox' Of Risk-To-Poor Capital Flows," American Economic Review, 2004, v94(2,May), 53-58.

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