Capital does not flow from rich countries to poor ones on anything like the scale that differences in capital per worker imply it should.
Lucas asked in 1990 why capital was not rushing from the United States to India, where the return on each additional machine should have been far higher. The candidate answers are human capital and infrastructure, which make workers less productive than the raw ratio suggests, and institutional risk, expropriation, weak contract enforcement and capital controls, which make the returns unavailable even where they exist. The question organised two decades of development economics.
In practice
- A fund finds a country where returns look unbeatable and cannot get its money out again, which is why they looked unbeatable.
- An employer puzzled that cheaper labour abroad has not undercut him learns what the wage does not include.
- Standing
- Unresolved in the sense that no single factor accounts for the gap, though institutional explanations now carry most of the weight.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- Rules for choosing, and the paradoxes that humbled the theory