American Economic Review Vol. 108 No. 12 2018

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

Lee E. Ohanian¹; Paulina Restrepo-Echavarria²; Mark L. J. Wright³

¹ Hoover Institution, Stanford University, 405 Hilgard Avenue, Los Angeles, CA 90089, UCLA, and NBER (email: ) · ² Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, Broadway and Locust Street, St. Louis, MO 63166 (email: ) · ³ Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55401, and NBER (email: )

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.

DOI

10.1257/aer.20151510

Volume

108

Issue

12

Pages

3541-3582

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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