THE MARGINAL PRODUCT OF CAPITAL

Whether or not the marginal product of capital (MPK) differs across countriesis a question that keeps coming up in discussions of comparative economic developmentand patterns of capital flows. Using easily accessible macroeconomic datawe find that MPKs are remarkably similar across countries. Hence, there is noprima facie support for the view that international credit frictions play a majorrole in preventing capital flows from rich to poor countries. Lower capital ratios inthese countries are instead attributable to lower endowments of complementaryfactors and lower efficiency, as well as to lower prices of output goods relative tocapital. We also show that properly accounting for the share of income accruing toreproducible capital is critical to reach these conclusions. One implication of ourfindings is that increased aid flows to developing countries will not significantlyincrease these countries’ capital stocks and incomes.[...]