With or Without a Paradox: Diving Into the Distribution of World Capital

GRANDES, MARTÍN; PÉREZ ARTICA, RODRIGO; DORCAZBERRO, DIEGO

Dublin

Conferencia; 9th INFINITI Conference on International Finance; 2011

Trinity College Dublin, The University of Dublin

Using an updated dataset on world foreign assets and liabilities and the Penn World Table, this paper builds an indicator which links world foreign capital distribution with per capita income growth to address two questions regarding the widely known phenomenon of the paradox of capital: How could the distance of one country’s share in global flows to its optimum according to standard growth and trade theories be measured? How does the world capital distribution look like when broken down by convergence clubs, regions, capital flows type, and sub-periods over the latest era of financial globalization, i.e. 1970-2007? The paper main findings are that the paradox is predominantly driven by increasing inequality in foreign debt capital flows directed to developed countries and to a much lesser extent by foreign equity capital or FDI flows. Most of the rising inequality occurs during the 1980s and early 2000s and is accounted for OECD countries´ share in world capital flows and sustained long run growth, on the one hand, and Latin American and Middle East countries declining share in those flows and relatively lower economic growth, on the other.