Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America
Lee E. Ohanian, Paulina Restrepo-Echavarria, Mark L. J. Wright
American Economic Review · 2018 · Volume 108 · Issue 12
Abstract
After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets, rather than domestic or international capital markets, account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia's rapid growth.
Keywords
Investment, Capital, Intangible Capital, Capacity, Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Business Fluctuations, Cycles, International Investment, Long-term Capital Movements, Current Account Adjustment, Short-term Capital Movements, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance, Empirical Studies of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence
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