| Global private capital flows have barely touched the poorest nations; the rich invest mostly with the rich. Confronted with this wealth bias in cross-border investment flows, theorists and empiricists have spent the last decade looking for an explanation. It is possible that failures in the global capital market prevent capital from exploiting high returns in poor countries; it is also possible that fundamental returns to investment are lower in poor countries. Chapter 1, written jointly with Jeffrey G. Williamson, explores the wealth bias of British capital exports during the great global capital market boom after 1870. This chapter constructs a panel data set for 34 countries that as a group received 92% of British capital, and uses it to conclude that international capital market failure had only second-order effects on the geographical distribution of British capital. It then ranks the three big domestic fundamentals that mattered most—schooling, natural resources and demography.; Chapter 2 asks whether or not a rich-country social planner, capable only of forcing capital flows across borders but not directly into the hands of individual poor-country entrepreneurs, could improve the efficiency of today's global capital allocation. She could but only to the extent that market failures cause wealth bias, and only to the extent that those market failures drive wedges expressly across international boundaries. A novel empirical framework concludes, however, that 85% of post-1970 wealth bias is domestic in origin.; Chapter 3 asks what the World Bank should optimally do with the US{dollar}10 to {dollar}20 billion it can loan each year. And has it, in fact, done what is optimal? These two issues, one theoretical and one empirical, have remained controversial for half a century in both academic and policy circles. A careful treatment of the empirical evidence on Bank lending strongly contradicts optimal behavior under different assumptions. The evidence, in fact, rejects any notion that the Bank has substituted for private capital or that it has successfully catalyzed private development finance. |
