Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation

Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych

The Review of Economics and Statistics, 2008, vol. 90, issue 2, 347-368

Abstract: We examine the empirical role of different explanations for the lack of capital flows from rich to poor countries-the "Lucas Paradox." The theoretical explanations include cross-country differences in fundamentals affecting productivity, and capital market imperfections. We show that during 1970-2000, low institutional quality is the leading explanation. Improving Peru's institutional quality to Australia's level implies a quadrupling of foreign investment. Recent studies emphasize 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. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2008
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Working Paper: Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation (2005)
Working Paper: Why does not capital frlow from rich to poor countries? An Empirical investigation (2004)
Working Paper: Why doesn't capital flow from rich to poor countries? An empirical investigation (2004)
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