Mufson answers Lucas

In a classic paper, economist Robert Lucas asked "Why Doesn't Capital Flow from Rich to Poor Countries?" The puzzle can be simply stated: Rich countries have a lot of capital, and poor countires have a little. Because of diminishing returns, the marginal product of capital should be low in rich countries and high in poor countries. So it should be profitable to move capital from rich to poor countries. But it doesn't much happen. Hence, the puzzle.

In yesterday's Washington Post, Steve Mufson (a friend of mine since the 5th grade and now a Post reporter) explains at least part of the Lucas puzzle:

Bolivian Gas Takeover Sets a Familiar Scene

By Steven Mufson

A new government in Bolivia, anxious to win public support, charges the big foreign oil companies with fraud and confiscates their local properties. The move generates applause among Bolivian citizens and attracts attention throughout Latin America.

The year: 1937.

Seven decades later, Latin America is experiencing another wave of nationalist fervor, fueled by old resentments and rising energy prices. Inspired in part by the economic nationalism of Venezuelan leader Hugo Chavez, new Bolivian President Evo Morales celebrated his 100th day in office Monday with a reprise of 1937: charging foreign oil firms with corruption and sending troops to seize control of the oil and gas fields.

In the end, say many foreign companies and economists, Bolivia -- and other countries that follow the same path -- might end up the loser. "The signal it sends is that no foreign investment is safe here," said Bernard Aronson, former assistant secretary of state for inter-American affairs and now managing partner of Acon Investments LLC, a private equity firm.