REEXAMINATION OF LUCAS PARADOX: GRAVITY MODEL APPROACH FOR BRICS COUNTRIES

Year 2019, Volume: 17 Issue: 2, 267 - 292, 30.06.2019

Harub Bal , Emrah Eray Akça , İpek Tekin , Mina Mahjoub Laleh

https://doi.org/10.18026/cbayarsos.585234

Abstract

Although the neo-classical theory argues that capital should flow from
developed countries to the developing countries until the marginal return of
investment among countries is equalized, Lucas (1990) reached the conclusion
that such capital flows have not occurred from US to India even though the
marginal return of capital in India is about 58 times that of US. Lucas
explained this paradoxical finding as of stemming from primarily human capital
differences, external benefits of human capital and capital market
imperfections. Lucas’s paradoxical findings brought intense debates with it on
the subject and led to researches on other determinants of capital flows. In
accordance with these discussions, our study questioned the existence of Lucas
Paradox for BRICS countries (Brazil, Russia, India, China, South Africa) using
panel data for 2002-2014 period. Findings obtained from the Augmented-Gravity
model confirm the existence of Lucas Paradox in BRICS countries. In other
words, marginal return of capital is not an important determinant of capital
inflows towards BRICS countries. The general conclusions of the study show that
capital inflows depend on institutional quality, agglomeration effect, trade
openness degree, exchange rate and volatility of inflation.

Keywords

Capital Movements, Foreign Direct Investments, Lucas Paradox, Gravity Model, BRICS

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