Skip to main content

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

Staff Report 563 | Published May 14, 2018

Download PDF

Authors

Lee E. Ohanian Consultant
Mark L. J. Wright Senior Vice President and Director of Research
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.




Published in: _American Economic Review_ (vol. 108 no. 12, December 2018, pp. 3541-3582) https://doi.org/10.1257/aer.20151510.