Friday, August 19, 2005

Why are poor countries poor?

Chris Dillow has commented on the paper titled "The Marginal Product of Capital (PDF)".
I liked his view so much that I have linked to it to share it with those that visit this blog.
He starts...

"How far can globalization raise the incomes of poorer countries? How far can foreign aid help?"

For his full commentary, visit Stumbling and Mumbling.
The paper itself starts...
"Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that theMPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial
market frictions.

Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries’ incomes."
For the full paper, click on the links.

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