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Federal Reserve Bank of St. Louis
Working Papers
Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007
Lee E. Ohanian
Paulina Restrepo-Echavarria
Mark L. J. Wright
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.


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Lee E. Ohanian & Paulina Restrepo-Echavarria & Mark L. J. Wright, Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007, Federal Reserve Bank of St. Louis, Working Papers 2014-38, 25 Nov 2013, revised 16 May 2017.
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Keywords: Capital Flows; Labor Markets; Domestic Capital Markets; International Capital Markets
DOI: 10.20955/wp.2014.038
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