Publications
Publications
- May 2008
- Review of Economics and Statistics
Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation
By: Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych
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.
Keywords
International Finance; Wealth and Poverty; Development Economics; Income; Capital Markets; Cross-Cultural and Cross-Border Issues; Australia; Peru
Citation
Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation." Review of Economics and Statistics 90, no. 2 (May 2008): 347–368.