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

Staff Report 563 | Published May 14, 2018

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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.