NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Flows to Developing Countries: The Allocation Puzzle

Pierre-Olivier Gourinchas, Olivier Jeanne

NBER Working Paper No. 13602
Issued in November 2007
NBER Program(s):   IFM   ITI

According to the consensus view in growth and development economics, cross country differences in per-capita income largely reflect differences in countries' total factor productivity. We argue that this view has powerful implications for patterns of capital flows: everything else equal, countries with faster productivity growth should invest more, and attract more foreign capital. We then show that the pattern of net capital flows across developing countries is not consistent with this prediction. If anything, capital seems to flow more to countries that invest and grow less. We argue that this result -- which we call the allocation puzzle -- constitutes an important challenge for economic research, and discuss some possible research avenues to solve the puzzle.

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Document Object Identifier (DOI): 10.3386/w13602

Published: Review of Economic Studies (2013) doi: 10.1093/restud/rdt004 First published online: January 22, 2013

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