Carmen Reinhart and Kenneth Rogoff explain the paradox of capital flows from poor to rich countries by ?
Correct answer: B. the price role of political and credit-market risk in many LDCs
- A. the brain drains from LDCs to DCs
- B. the price role of political and credit-market risk in many LDCs
- C. the law of increasing returns that implies that the marginal productivity of capital is higher in LDCs
- D. the fat that the DC capital market is perfectly competitive
Explanation
Reinhart and Rogoff highlight political and credit-market risks in developing countries, which can make investment there appear less safe despite potentially higher returns. These risks help explain why capital may flow from poorer to richer countries.
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