Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007

RePEc Short ID: pre260
ORCID iD: 0000-0002-1481-051X

Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Wright, Mark L. J.

doi:10.20955/wp.2014.038

Working Paper

Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007

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 their removal accounts for much of Asia?s growth.

Keywords: Capital Flows; Labor Markets; Domestic Capital Markets; International Capital Markets;

JEL Classification: F41; F42; F43; F44;

https://doi.org/10.20955/wp.2014.038