Should Capital Flow from Rich to Poor Countries?
20 Pages Posted: 27 Nov 2019 Last revised: 6 Mar 2020
Date Written: 2019
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, SantaeulÃ lia-Llopis, and SÃ¡nchez (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 worldâ€™s output. Moreover, contrary to the findings of Monge-Naranjo, SantaeulÃ lia-Llopis, and SÃ¡nchez (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: Suggested Citation