Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America

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

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

doi:10.21034/sr.563

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Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America

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: Domestic capital markets; Capital flows; International capital markets; Labor markets;

JEL Classification: J20; F21; F41; E21;

https://doi.org/10.21034/sr.563