Should Capital Flow from Rich to Poor Countries?

20 Pages Posted: 27 Nov 2019 Last revised: 6 Mar 2020

See all articles by Alexander Monge-Naranjo

Alexander Monge-Naranjo

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Raül Santaeulàlia-Llopis

MOVE-UAB

Date Written: 2019

Abstract

Are human and physical capital stocks allocated efficiently across countries? To answer this question, we need to differentiate misallocation from factor intensity differences. We use newly available estimates on factor shares from Monge-Naranjo, Santaeulàlia-Llopis, and Sánchez (2019) to correctly measure the factor shares of physical and human capital for a large number of countries and periods. We find that the global efficiency losses of the misallocation of human capital are much more substantial than those of physical capital, amounting to 40 percent of the world’s output. Moreover, contrary to the findings of Monge-Naranjo, Santaeulàlia-Llopis, and Sánchez (2019) for physical capital, the global misallocation of human capital does not seem to be subsiding. We argue that the proper measure of global misallocation requires considering the potential gains of reallocating both physical and human capital. In this case, the implied efficiency loses from misallocation are up to 60 percent of global output. Attaining those gains, contrary to the prominent Lucas paradox (Lucas, 1990), would often require physical capital to flow from poor to rich countries.

JEL Classification: O11, O16, O41

Suggested Citation

Monge-Naranjo, Alexander and Sanchez, Juan M. and Santaeulalia-Llopis, Raul, Should Capital Flow from Rich to Poor Countries? (2019). Review, Vol. 101, Issue 4, pp. 277-295, 2019. Available at SSRN: https://ssrn.com/abstract=3494168 or http://dx.doi.org/10.20955/r.101.277-95

Alexander Monge-Naranjo (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Raul Santaeulalia-Llopis

MOVE-UAB ( email )

Plaza Cívica, s/n
Bellaterra, Barcelona 08193
Spain

HOME PAGE: http://r-santaeulalia.net

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