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

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-11-04

Number: 2014-38