We examine the empirical role of difierent explanations for the lack of ∞ows of capital from rich to poor countries|the \Lucas Paradox." The theoretical explanations include difierences in fundamentals across countries and capital market imperfections. We show that during 1970i2000 low institutional quality is the leading explanation. For example, improving Peru’s institutional quality to Australia’s level, implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income, but remain silent on the speciflc mechanisms. Our results indicate that foreign investment might be a channel through which institutions afiect long-run development.

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Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation

We introduce imperfect creditor protection in a multi-country version of Schumpeterian growth theory with technology transfer. The theory predicts that the growth rate of any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. The theory also predicts that in a country that converges to the frontier growth rate, financial development has a positive but eventually vanishing effect on steady-state per-capita GDP relative to the frontier. We present cross-country evidence supporting these two implications. In particular, we find a significant and sizeable effect of an interaction term between initial per-capita GDP (relative to the United States) and a financial intermediation measure in an otherwise standard growth regression, implying that the likelihood of converging to the U.S. growth rate increases with financial development. We also find that, as predicted by the theory, the direct effect of financial intermediation in this regression is not significantly different from zero. These findings are robust to alternative conditioning sets, estimation procedures and measures of financial development.

/pdf/the-effect-of-financial-development-on-convergence-theory-1ndrtkqqxv.pdf

The Effect of Financial Development on Convergence: Theory and Evidence

This research advances and empirically establishes the hypothesis that, in the course of the prehistoric exodus of Homo sapiens out of Africa, variation in migratory distance to various settlements across the globe affected genetic diversity and has had a persistent humpshaped effect on comparative economic development, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. While the low diversity of Native American populations and the high diversity of African populations have been detrimental for the development of these regions, the intermediate levels of diversity associated with European and Asian populations have been conducive for development. (JEL N10, N30, N50, O10, O50, Z10) Prevailing hypotheses of comparative economic development highlight various determinants of the remarkable inequality in income per capita across the globe. The significance of geographical, institutional, and cultural factors, human capital, ethnolinguistic fractionalization, colonialism, and globalization has been at the heart of a debate concerning the genesis of the astounding transformation in the pattern of comparative development over the past few centuries. While early research focused on the proximate forces that contributed to the divergence in living

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The 'Out of Africa' Hypothesis, Human Genetic Diversity, and Comparative Economic Development

We investigate the role of deeply rooted pre-colonial ethnic institutions in shaping comparative regional development within African countries. We combine information on the spatial distribution of ethnicities before colonization with regional variation in contemporary economic performance, as proxied by satellite images of light density at night. We document a strong association between pre-colonial ethnic political centralization and regional development. This pattern is not driven by differences in local geographic features or by other observable ethnic-specific cultural and economic variables. The strong positive association between pre-colonial political complexity and contemporary development also holds within pairs of adjacent ethnic homelands with different legacies of pre-colonial political institutions.

/pdf/pre-colonial-ethnic-institutions-and-contemporary-african-146jk0svzg.pdf

Pre-colonial Ethnic Institutions and Contemporary African Development

There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events Looking at terrain ruggedness, we are able to estimate the importance of these two channels Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income However, in Africa rugged terrain afforded protection to those being raided during the slave trades Since the slave trades retarded subsequent economic development, in Africa ruggedness has also had a historical indirect positive effect on income Studying all countries worldwide, we find that both effects are significant statistically and that for Africa the indirect positive effect is at least as large as the direct negative effect Looking within Africa, we also provide evidence that the indirect effect operates through the slave trades

Ruggedness: The blessing of bad geography in Africa

In this paper, an index of the depth of experience with state-level institutions, or state antiquity, is derived for a large set of countries. We show that state antiquity is significantly correlated with measures of political stability and institutional quality, with income per capita, and with the rate of economic growth between 1960 and 1995. State antiquity contributes significantly to the explanation of differences in growth rates, explaining half of the differences in growth rates between countries like China and Mauritania, which are located at the two ends of the spectrum. It is also a good instrument for “social infrastructure,” which explains cross-country differences in worker productivity.

States and Markets: The Advantage of an Early Start

States and markets have sometimes been viewed as competitors, but in the last decade, there has been increasing agreement that a capable state can play an important facilitating role in the process of economic development. A number of studies have explored the empirical connection between measures of political stability and bureaucratic competence, on the one hand, and rates of economic growth, on the other. There is some evidence from these, and also arguments at the case study level, that a stable and competent state is indeed a contributing factor in economic growth. In this short paper, we investigate the possibility that differences not only in state capacity but more broadly, in the capacity to mount an effective drive toward economic development, derive in part from very long run historical processes giving rise to different potentials for growth. We test the idea that more longstanding experience with a national state in the past is associated, in recent times, with (a) greater political stability and better quality government, (b) higher incomes, and (c) faster rates of economic growth.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID293581_code011213670.pdf?abstractid=293581&mirid=5

Valerie Bockstette

Papers

States and Markets: The Advantage of an Early Start

States and Markets: The Advantage of an Early Start