Why are poor countries poor?

Daniel Cohen; Marcelo Soto
Authors registered in the RePEc Author Service: Marcelo Soto and Daniel Cohen

No 75, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: We attempt to explain why standard explanations of the poverty of nations are unsatisfactory. We first argue that human capital is low in poor countries because its production has increasing returns with respect to life expectancy. We then show that the reason why capital does not flow to poor countries (the Lucas paradox) can readily be explained once market prices rather than PPP prices are used to assess the return to physical capital: the return to capital in poor countries is not higher than in the rich world in spite of its relative scarcity. We finally argue that PPP calculations bias downwards the measured TFP of poor countries, which may in part explain their lower productivity. The message of hope is that education can shoot up as life expectancy increases. A higher level of human capital would appreciate the real exchange rate through a Balassa-Samuelson effect, thus raising the profitability physical capital. This in turn would encourage foreign capital to flow to developing countries

Keywords: Human capital; capital flows; Lucas Paradox (search for similar items in EconPapers)
JEL-codes: F21 J24 O47 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-dev and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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