Stiglitz the world bank, washington, dc, usa summary. Capital account liberalization does not, however, lead to higher growth in emerging market democracies that have weak welfare states. Capital account liberalization and economic growth. The views expressed here are those of the author and do not necessarily reflect those of the ecb. Impacts of capital account liberalization on economic. Recently, capital controls have made a comeback as both policymakers and academia have questioned the net benefits of liberalization and economic growth, especially after the 2008 great recession. For example, in his survey of the research on capital. Strengthening financial access, depth, stability, and efficiency contributes to reducing income inequality and poverty, which is robust to different datasets and measurements. Capital account liberalization, financial depth, and economic. The case for capital market liberalization is largely based on standard efficiency arguments, employing a conventional neoclassical model and ignoring the special ways in which financial and capital markets differ from markets for ordinary goods and services, such as steel. Capital market liberalization, economic growth, and. Unfortunately, the results of these studies have been mixed at best.
Aug 08, 2012 countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions, and they also enjoyed greater economic growth. Capital account liberalization, institutional quality and. The case for financial sector liberalization in ethiopia kozo kiyota. Capital account liberalization, financial depth, and economic growth. Capital account liberalization, financial depth and. Capital account liberalization and economic growth revisited. We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986. We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986 to 1995. World bank bmz giz workshop managing risk for development in preparation for the world development report 2014. Indiana university, bloomington, in 47405 usa june 2, 2004 abstract we examine the e. Does financial liberalization matter on capital flows and. This paper takes as its point of departure a recent imf paper, to provide insights both into how the imf could have gone so wrong in its advocacy of capital market liberalization and into why capital market liberalization has so often led to increased economic instability, not to economic growth. The capital account liberalization is a critical policy decision for the emerging market economies emes. Capital account liberalization financial depth core.
Capital account liberalization and the neoclassical growth model this section illustrates the fundamental predictions of the neoclassical growth model about the impact of capital account liberalization on a developing country. Roughly speaking, the threshold for capital inflow is the financial development of switzerland in the 1960s, while for outflow it is the financial development of england in the late 1990s. Capital account liberalization, financial development and industry growth. This paper shows that the effects of capital account liberalization on growth depend upon the environment in which that policy change occurs. Essays on financial liberalisation, financial crises and.
Klein fletcher school, tufts university and nber first draft. Banking crises are harmful for growth, but to a lesser extent in countries with open financial systems and good institutions. Mar 24, 2009 the literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. Capital market liberalization, economic growth, and instability joseph e. We show a statistically significant and economically relevant effect of open capital accounts on financial depth and economic growth in a crosssection of countries over the period 1986 to 1995, as well as over the period 1976 to 1995. The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. Capital account liberalization, the cost of capital, and economic growth peter blair henry capital account liberalization was once seen as an inevitable step along the path to economic development for poor countries. Capitalaccount liberalization, the cost of capital, and economic growth by peter blair henry capital account liberalization was once seen as an inevitable step along the path to economic development for poor countries. The positive and significant impact of open capital account on financial depth and economic growth is limited only to developed countries included in the sample in a study by klein and olivei 2001.
We next turn to an analysis of the way in which capital account liberalization, by promoting financial deepening, contributes to economic growth. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market. Capital account liberalization, financial depth and economic. We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a. The results suggest also that financial sector liberalization, particularly capital account liberalization, widens inequality and the poverty gap. Capital account liberalization and economic performance. Economywide growth and capital account liberalization are. Pdf capital account liberalization, financial depth, and. Capital account liberalization, financial depth and economic growth. Capital account liberalization, financial development and. Theoretically, the relation between trade and capital account liberalization is not a simple one. A common explanation as to why empirical studies do not obtain robust results. National bureau of economic research, cambridge, ma 028 usa christian lundblad. Klein and giovanni olivei, title capital account liberalization, financial depth, and economic.
Similarly, klein 2005 empirically examines the link between liberalization of capital account. Different effects of inflow and outflow liberalization qin gou, yiping huang and jianguo xu preliminary draft. Capital account liberalization, the cost of capital, and economic growth by peter blair henry january 2003 stanford university and nber. The framework is not novel, but it brings clarity to the discussion of the empirical literature that follows in.
In this case, however, capital account liberalization is shown to affect economic growth through its effect on financial depth. Shows a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986 to 1995. The implications of capital account liberalization for economic growth are among the most contentious international monetary and. Our theories of financial development need to explain both the relatively high persistence in degree of financial depth as shown in key indicators and the nontrivial changes in the ranking across countries at different moments in time. Liberalizing the capital account, it was said, would permit. For example, indonesia, which had liberalized capital flows in 1970,liberalized interest rates in. Trade liberalization, capital account liberalization and.
The various empirical measures used to gauge the presence of controls on capital account transactions as well as indicators of stock market liberalization are discussed. This paper examines the link between financial openness and financial development through panel data analysis on advanced and emerging market countries. How and where capital account liberalization leads to. Does capital account liberalization spur economic growth. A capital account liberalization is a decision by a countrys government to move from a closed capital account regime, where capital may not move freely in and out of the country, to an open capital account system in which capital can enter and leave at will. The second indicator, commercialcentral bank, is defined as commercial bank. It discusses the results of an empirical analysis between both variables and economic growth. Third, the effect of financial integration on economic growth also depends on the same preconditions in these countries. In that sense we complement the existing literature by saying something about why these two reforms might be related.
Capital account liberalization, financial depth and economic growth, nber working papers 7384, national bureau of economic research, inc. Capital account liberalization, financial depth, and. Theory and evidence article pdf available march 2005 with 409 reads how we measure reads. Financial development, financial openness, and economic. Capital account liberalization, economic growth, globalization. This paper will examine the effect of capital account liberalization on growth in an attempt to contribute to this debate. In this paper we examine whether there is evidence of a causal link from capital account liberalization to financial depth and, through this channel, to overall economic growth. Capital account liberalization and economic growth in. Financial development, financial openness, and economic growth this paper examines the importance of financial development and openness. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with. Impacts of capital account liberalization on economic growth.
International financial liberalization and economic growth. Second, to have successful capital account liberalization in developing countries, the empirical investigation highlights a need to develop the institutional environment and the private sector as prerequisites. The expected benefits of financial liberalizationand particularly a liberalized capital accountare the ability to undertake investments in excess of the level of domestic savings which is especially important for latin american countries with low savings rates and finance economic growth. Countries with open capital accounts over some part or all of these periods had a. Carlson school of management, university of minnesota, minneapolis, mn 55455, usa central bank of chile, santiago, chile and the world bank, washington, dc 20433, usa. We find that capital account liberalization has a robust and direct effect on subsequent economic growth in most countries. Measures of financial depth and capital account liberalization. This paper was prepared for the session, debt, equity, and financial openness at the american economic association meetings in washington, d. Financial liberalization, banking crises and growth. Capitalaccount liberalization, the cost of capital, and economic growth by peter blair henry capitalaccount liberalization was once seen as an inevitable step along the path to economic development for poor countries. Capital account liberalization, the cost of capital, and.
These countries have also experienced the risks in capital flight and financial imbalance. Journal of monetary economics 46 2000 3177 financial intermediation and growth. Trade liberalization and the politics of financial development. Financial liberalization, economic growth, stability and. Benefits and risks from financial liberalisation marcel fratzscher. Citeseerx document details isaac councill, lee giles, pradeep teregowda. International finance and growth in developing countries. A synthetic view barry eichengreen, rachita gullapalli and ugo panizza january 2009 abstract this paper synthesizes previous studies analyzing the effects of capital account liberalization on. We revisit the effect of capital account liberalization on economic growth by considering liberalization of capital inflows and capital outflows separately. However, the interaction term of bureaucracy quality and financial openness has a significant and positive impact on economic growth.
The positive effect of financial liberalization is robust to different definitions. Capital flows, capital account openness, financial liberalization, economic growth authors email address. What were the impacts of capital account liberalization on econo mic growth. Capital account liberalization, institutional quality and economic growth. The case for financial sector liberalization in ethiopia. System estimates indicate that cal determines growth through financial development and openness to trade.
Pdf capital account liberalization, financial depth and. Trade liberalization, capital account liberalization and the. Most importantly, it highlights that reformminded developing countries with low. Using indices, financial openness together with institutional and educational variables explains a large part of the variation in financial development across countries and over time. The residual effect of cal on growth after accounting for these two channels is negligible.
Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions. The role of skill level and financial depth overall, the analysis provides new evidence on the role of crosscountry heterogeneities in shaping distributional responses after capital account openings. The estimate of the financial depth equation shows a significant positive effect of an open capital account on financial depth, even when controlling for economic growth. Many argue that financial opening spurs economic growth because it.
In order to gauge the effect of capital account liberalization on economic growth through its effect on financial depth, we consider the product of the coefficient of capital account liberalization on the change in financial depth, represented by. Capital account liberalization, growth and the labor share of. Capital account liberalization and financial sector stability. Capital market liberalization, economic growth, and instability. Financial deepening, capital account openness, institutions, private sector. Klein, luca antonio ricci, and torsten slok this paper surveys the literature on the effects of capital account openness and stock market liberalization on economic growth and provides a synthesis in which. Capital account liberalization and financial liberalization more generally are inevitable for countries that wish to take advantage of the substantial benefits from participating in the open world economic system in todays age of modern information and communications technologies. Capital account liberalization, financial depth, and economic growth, working papers 996, federal reserve bank of boston, revised 1999. Liberalizing the capital account, it was said, would permit financial resources to flow from capitalabundant countries, where. Capital account liberalization continues to have an important role in the determination of financial depth for the oecd countries included in the crosssection. Does capital account liberalisation promote economic growth.
Capital account liberalization, financial depth, and economic growth 2005. While the removal of capital account restrictions is effective. Drawing on country experiences, the paper develops an operational framework for sequencing and coordinating capital account liberalization with other policies aimed at maintaining financial sector stability. Pdf capital account liberalization and economic growth. In addition, capital market liberalization exposes countries to vicissitudes associated with changes in economic circumstances outside the country. Economywide growth and capital account liberalization are simultaneously determined. Theory yields no unambiguous prediction of whether opening the capital account is growth enhancing or growth inhibiting. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions, and they also enjoyed greater economic growth. This research work aims at exploring the impact of capital account liberalization on economic growth in the 17 emerging economies over the period 1991 2015.
International financial liberalization and economic growth ross levine abstract this paper pulls together existing theory and evidence to assess whether international. Capital account liberalization, the cost of capital, and economic growth peter blair henry center on democracy, development, and the rule of law freeman spogli institute for international studies this working paper was produced as part of cddrls ongoing programming on economic and political development in transitional states. The results show that corruption and democratic accountability have a significant and negative impact on economic growth if capital account liberalization is enacted. These results, however, are largely driven by the developed countries included in the sample. Capitalaccount liberalization, the cost of capital, and.
This provides the foundations for the argument for intervention in shortterm. A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from crossborder financial flows. With growth come higher incomes, and with higher incomes come. With growth come higher incomes, and with higher incomes come the stronger institutions and policies needed to manage capital flows and heighten the likelihood that the benefits of an open capital account. Financial liberalization, growth and financial crisis. Capital account liberization, financial depth, and economic growth. There results, however, are largely driven by the developed countries in the sample. This paper proposes a threeequations empirical representation of the channels linking capital account liberalization cal and economic growth. Measuring capital account liberalization most empirical studies of capital account openness employ a dummy variable from. The results confirmed that the degree of capital account liberalization matters to economic growth in the case of the philippines.
Olivei, 2008, capital account liberalization, financial depth, and economic growth, journal of international money. The economic and social effects of financial liberalization. Capital account liberalization, financial development and industry. Capitalmarket liberalization, globalization, and the imf.
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