Examples of The Lucas Paradox: 20th Century Development of Third World Nations
Lucas’ seminal paper was a reaction to observed trends in international development efforts during the 20th century. Regions characterized by poverty, such as India, China and Africa, have received particular attention with regard to the underinvestment predicted by Lucas. Africa, with its impoverished populace and rich natural resources, has been upheld as exemplifying the type of the nation that would, under neoclassical assumptions, be able to offer extremely high returns to capital. The meager foreign capital Africa receives outside of the charity of multinational corporations reveals the extent to which Lucas captured the realities of today’s global capital flows.
Authors more recently have focused their explanations for the paradox on Lucas’ first category of explanation, the difference in fundamentals of the production structure. Some have pointed to the quality of institutions as the key determinant of capital inflows to poorer nations. As evidence for the central role played by institutional stability, it has been shown that the amount of foreign direct investment a country receives is highly correlated to the strength of infrastructure and the stability of government in that country.
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