Although the “Lucas Paradox” has sparked extensive literature on the determinants of international capital flows between developed countries and developing countries, few papers have captured substantial private capital inflows to emerging economies with good economic performance. In this paper, we develop a model where countries differ in their factor endowments and governments' development strategies. If the government in a labour-abundant country, influenced by inappropriate development ideas, employs policy interventions to favour the development of the capital-intensive sector, the economic performance will be poor and capital return will be repressed. As a result, capital outflow will occur. We test the theory using comprehensive data with a novel measure of distortions caused by development strategy. Our results show that a reduction in strategy distortions significantly increases capital inflows. In addition, the Lucas Paradox arises only when developing countries implement highly distorted development strategies, and the threshold above which GDP per capita is significantly positively correlated with capital inflows is close to the average extent of policy distortions in some faster-growing developing countries since the 1990s.

This paper proposes a theory of the dynamics of factor shares within the context of an equilibrium model of endogenous innovation, growth, and cycles. Our deterministic model rests on two assumptions: (i) production requires two complementary inputs, capital, and labor, and (ii) technical progress is labor-saving and embodied in capital goods. The model’s unique equilibrium path displays recurring growth cycles, each consisting of an adoption and innovation phase, along which factor shares fluctuate within bounds. The interaction between factor prices and opportunities for labor-saving innovations brings about both persistent growth and aggregate oscillations through which it takes place. We provide evidence that the model-implied correlations between factor shares and the other labor market variables are consistent with the data.

Demystifying the World Economic Development, co-authored by Prof. Justin Yifu Lin and Fu Caihui, from the Institute of New Structural Economics (INSE) at Peking University, has been published by Springer as part of the "Contributions to Economics" series. The book serves as a companion volume to Demystifying the Chinese Economy (2009), authored by Justin Yifu Lin.

Our paper seeks to evaluate the role of development financing institutions (DFIs) in fostering renewable energy transformations. Whereas the conventional DFI approach to renewable energy finance emphasizes the bankability of individual projects, we advance an alternative approach for the role of DFIs in overcoming system-level constraints to enhance renewable energy transformations. We identify four constraints: namely, the incumbent entrenchment of fossil fuels, unmet energy demand of energy-intensive industries, weak production capacity of renewable energies, and lack of supporting infrastructure. We argue that DFIs can potentially address these constraints by setting a mission-driven vision, acting as honest brokers to overcome the incumbent entrenchment, scaling up renewable energy financing to make the cost of renewable energies more competitive, incubating nascent renewable energies, and financing supporting infrastructure. We then select representative DFIs to evaluate the role of DFIs in fostering renewable energy transformations. We find that most sampled DFIs have recently prioritized financing renewable energy, supported pilot projects to achieve demonstration effects, and made investments in complementary infrastructure. Yet few DFIs have achieved the economies of scale to bring down the renewable energy price or shape the policy environment in favor of renewable energy in a manner that can trigger significant transformational change.

We analyze why national development banks (NDBs) may provide longer-term loans to firms than private commercial banks (PCBs). If NDB bonds have higher collateral value than PCB bonds, then NDBs may lend longer-term than PCBs. NDBs may enjoy higher recapitalization willingness and capacity by the state and hence greater collateral value than PCBs. Moreover, NDBs may have advantages over state-owned commercial banks if NDB bonds enjoy higher market liquidity. However, NDBs may suffer from poor monitoring quality owing to undue political intervention, thus undermining collateral value. Our study implies that NDBs are not substitutes for but complements to PCBs.

Despite its practical significance in promoting long-term economic growth, long-term finance is often in short supply, especially in developing countries. Governments in both developed and developing countries have established national development banks (NDBs) to provide much-needed long-term loans. We have built the first database on NDBs worldwide to systematically examine whether NDBs lend longer than commercial banks in deciding the maturity of their loans. We find that long-term loans constitute a larger proportion of the total loan portfolio in NDBs than that in commercial banks in general and privately owned commercial banks in particular. This result is statistically significant after controlling for country- and bank-level factors. Our study contributes to the literature on loan maturity because we are the first to use a comprehensive panel data to systematically examine whether NDBs—an understudied but important financial intermediary—play a maturity-lengthening role in filling the financing gap.