Capital profitability and economic growth

Abstract

This paper analyzes the connection between the macroeconomic profitability of capital and potential GDP growth for 109 countries divided into highly developed (HDC), less developed (LDC), and transition economy (TEC) groups. We find that, contrary to some recent studies, the globalization of capital markets and more rapid capital accumulation in LDC and TEC have not led to the convergence of macroeconomic rates of return (ROR) across countries. The existing differences among national ROR imply underinvestment in the majority of developing and transition countries. The counterfactual estimation of potential changes in GDP assuming equalization of ROR reveals major gains that could accrue to developing countries.