Working Paper: NBER ID: w11901
Authors: Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych
Abstract: We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries the "Lucas Paradox." The theoretical explanations include differences in fundamentals across countries and capital market imperfections. We show that during 1970-2000 low institutional quality is the leading explanation. For example, improving Peru's institutional quality to Australia's level, implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income, but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.
Keywords: capital flows; institutional quality; Lucas paradox; foreign investment
JEL Codes: F21; F41; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improving Peru's institutional quality to Australia's level (O56) | Foreign investment inflows (F21) |
| Enhancing Turkey's institutional quality to that of the UK (F55) | Foreign investment inflows (F21) |
| Institutional quality (I24) | Long-term development (O29) |
| Low institutional quality (O17) | Lack of capital flows from rich to poor countries (F32) |
| Institutional quality (I24) | Capital flows (F32) |
| Institutional quality (I24) | Foreign investment inflows (F21) |