Working Paper: Patterns of international capital flows and their implications for developing countries
According to a standard economic theory, capital should flow from rich capital-abundant countries to poor capital-scarce countries. However, a reverse pattern has prevailed in the world economy. This is the so-called Lucas paradox.
In addition, it has been shown that counterintuitively there is negative correlation between capital inflow and productivity growth across developing countries. This is the so-called allocation puzzle.
This survey attempts to shed light on the following questions: 1) What are the patterns of international capital flows in the world economy? 2) What are the most plausible explanations for these patterns? 3) What are the possible implications of these developments for developing countries?