Abstract
This chapter reviews alternatives to conventional estimates of the marginal product of capital (MPK) and examines whether these revised estimates of MPK succeed in helping us understand observed international capital flows. Bivariate data analysis (i.e., using scatter plots of capital inflows and revised MPK estimates) conducted in this chapter suggests that the direction of capital flows points, if anything, towards relatively low-return countries, a pattern that runs opposite to the prediction of standard theory about the direction of capital flows. Instead of solving the Lucas paradox, these revised MPK estimates recast the puzzle from Lucas’ original question of ‘Why doesn’t capital flow to poor countries?’ to a new one: Why does capital flow to low-return countries? An explanation to this new puzzle is presented as that the revised MPK estimates do not capture adequately all the important factors that influence international capital flows. This chapter also brings a detailed discussion for better understanding the distinction between gross and net capital flows.
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Notes
- 1.
Countries are classified as poor or rich following the World Bank definition. This classification divides the sample into 30 poor countries and 22 rich countries. For the list of countries used in CF (2007), see Appendix D.
- 2.
CM find that the adjustment costs are inversely related to per capita income.
- 3.
The revised MPK estimates of CM and Swan are not considered because CM report only the averages MPK for a rich-country-sample and a poor-country-sample and do not report country-specific MPK estimates. Swan reports MPK estimates for a small number of 28 countries only out of CF’s 53 countries.
- 4.
Definitions of the types of capital are according to the IMF’s Balance of Payments and International Investment Positions Manual (BPM6), Chap. 7.
- 5.
This is consistent with the expectation that capital flow is heterogeneous across its types and depends on country-specific characteristics; for example, FDI targets the countries where factors complementary to capital (e.g., human capital stock) are higher.
- 6.
Jensen (2003) for example, uses the term “net FDI inflows” to refer to data obtained from the WDI, stating that it “…should not confused with overall net FDI flows. Net FDI flows are total FDI inflows of foreign capital minus total FDI outflows of domestic capital” (p. 597). Busse and Hefeker (2007) refer to their dependent variable as “FDI net inflows”, but they explicitly define this as inflows net of outflows (or “net FDI flows” as defined in our discussion above.
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Akhtaruzzaman, M. (2019). The Lucas Paradox: Review of Marginal Product of Capital and Net Versus Gross Capital Flows. In: International Capital Flows and the Lucas Paradox. Springer, Singapore. https://doi.org/10.1007/978-981-13-9069-2_3
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