Another iconic development article to discuss is Lucas, R. E. (1990). Why doesn't capital flow from rich to poor countries?. The American Economic Review, https://pages.nyu.edu/debraj/Courses/Readings/LucasParadox.pdf, The question that is raised in the paper is often called the "Lucas puzzle". Briefly answer the following questions:

1. What does the simple economic theory predict? Shortly explain this prediction.

2. What counter example to the theory is given in the text? Can you think of a historical example for a time and place when the theory didn't get it wrong?

3. Explain the first candidate answer Lucas raises for the question. (Hint: ". . . each American or Canadian worker was estimated to be productive equivalent to about five Indians or Ghanians"). How does he refute this answer?

4. Choose another candidate answer from the next two in the text and briefly explain it, in your own words.

5. After reading this paper and hopefully thinking about this puzzle a bit, give your opinion - why doesn't capital flow from rich to poor countries?

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1 In simple economic theory capital flows from rich to poor countries are predicted due to the principle of diminishing marginal returns According to ... View the full answer