Why Are Poor Countries Poor ?

We attempt to explain why standard explanations of the poverty of nations are unsatisfactory. We first argue that human capital is low in poor countries because its production has increasing returns with respect to life expectancy. We then show that the reason why capital does not flow to poor countries (the Lucas paradox) can readily be explained once market prices rather than PPP prices are used to assess the return to capital. We finally argue that PPP calculations bias downwards the measured TFP of poor countries, which may in part explain their lower productivity. The message of hope is that education can shoot up as life expectancy increases, while physical capital could flow in as the real exchange rate appreciates. JEL classification: F21; J24; O47; P36 * The authors would like to thank Paul David, Kenneth Rogoff and Jorge Braga de Macedo for stimulating discussions on the ideas presented here. The views expressed in this paper do not necessarily represent those of the OECD. a Ecole Normale Supérieure and OECD Development Centre. E-mail : [email protected] b DELTA and OECD Development Centre. E-mail : [email protected]