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Federal Reserve Bank of Minneapolis
Staff Report
Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America
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 improvement in these distortions over time accounts for much of Asia’s rapid growth.


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Lee E. Ohanian & Paulina Restrepo-Echavarria & Mark L. J. Wright, Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America, Federal Reserve Bank of Minneapolis, Staff Report 563, 14 May 2018.
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Keywords: Capital flows; Labor markets; Domestic capital markets; International capital markets
DOI: 10.21034/sr.563
For corrections, contact Jannelle Ruswick ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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