Why doesn't capital flow from rich to poor countries?

This video looks at and tries to answer the Lucas Paradox. This asks the question of why we don't see capital flowing heavily from rich to poor countries. This was the topic of Robert Lucas' 1990 paper "Why Doesn't Capital Flow From Rich to Poor Countries?".
We first set up the idea behind the Lucas Paradox by stating the assumptions, similar to those seen in a Solow Growth Model. Consider 2 economics producing the same output, both with a constant returns to scale production function, which relates output to homogeneous capital and labour/labor inputs. If production per worker is different between these 2 economies, it must be the case that they have differing levels of capital per worker. The assumptions made mean there is no other possible explanation. From this, using the Law of Diminishing Returns to Capital, we must have that the marginal product of capital is higher in the poorer economy. If this is true, and we have trade of capital goods that is perfectly competitive with no capital market imperfections, then new investment will only take place in the poorer economy. This would then continue until the capital-labour ratios, and hence wage rates and returns to capital, are equalised.
In reality there is some investment by rich countries into poorer ones, but not anywhere near the scale that this model would predict. Lucas does a rough calculation to show the differential here between the USA and India could be up to 58 times.
I then explain some of the explanations posited in his paper as to why we don't see such transfers from wealthy nations to poorer ones. These explanations are often seen as augmentations to the basic Solow Model to make it more realistic.
Watch my playlists to understand more about the Solow Growth Model.
Why Doesn't Capital Flow from Rich to Poor Countries?
Author(s): Robert E. Lucas, Jr.
Source: The American Economic Review, Vol. 80, No. 2, Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association (May, 1990), pp. 92-96
Published by: American Economic Association
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