CAPITAL MOBILITY AND GROWTH IN THE DEVELOPING WORLD : An Empirical Investigation
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Published
Mar 1, 2010
Abstract
This paper investigates the link between financial liberalisation and growth for a cross – section of seventeen developing countries, including India, both theoretically and empirically. It also explores the different measures of capital account openness and the empirical evidence on the association between financial openness and growth. Theoretically capital account openness leads to growth through two main channels: increase in aggregate investment and an improvement in productivity and efficiency. Existing empirical evidence however suggests that the link between capital account openness and economic growth is weak. The paper uses a de jure measure of capital account convertibility, calculated as the proportion of capital flows to total flow of funds. The results find a positive association between financial openness and growth for some countries in the sample. However the investment effect is found to be weak or of no significance for the majority of the sample.
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Keywords
capital flowsfinancial liberalisationgrowth
References
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• Bekaert, Geert, Campbell Harvey, and Christian Lundblad (2001) “Does Financial Liberalization Spur Growth ?” NBER Working Paper No 8245, Cambridge, Massachusets.
• Chanda A.(2001) “The Influence of Capital Controls on long run Growth: Where and How Much?”, unpublished, Providence, Rhode Island: Brown University.
• Chenery and Bruno (1962) “Development Alternatives in an Open Economy: The Case of Israel” Economic Journal 57: 79- 103.
• Diaz- Alejandro,Carlos (1985), “Goodbye Financial Repression, Hello Financial Crash”, Journal of Development Economics, 19, pp 1-24.
• Dooley M P, (1994), “ Are Capital Inflows to Developing Countries a Vote For or Against Economic Policy Reforms?”, University of California, Santa Cruz, Working Paper No 295.
• Edwards, Sebastian (2001) “Capital Mobility and Economic Performance: Are Emerging Economies Different” NBER Working Paper no 8076, NBER, Massachusetts, Cambridge.
• Grossman G M and E Helpman (1991), “Innovation and Growth in the Global Economy” MIT Press, Cambridge.
• Gurley ,J.G and E.S Shaw (1960) “Financial Aspects of Economic Development”, Asian Economic Review,45, September, pp 515-33.
• Guttentag J M and R J Herring,(1985) “Disaster Myopia in International Banking” , Brookings Papers in International Economics, No 31.
• Kemp, M.C. (1961) “Foreign Investment and National Advantage” Economic Record, 28, 56 –62.
• Klein ,Michael and Giovanni Olivei (1999) “Capital Account Liberalization, Financial Depth and Economic Growth” NBER Working Paper 7834, Cambridge Massachusets.
• Kraay,Aart, (1998) “In Search of the Macro-economic Effects of Capital Account Liberalization”, unpublished, The World Bank, Washington.
• Lane, Philip R., and Giani Maria Milesi-Ferreti, (2001) “The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Nations,” Journal of International Economics, Vol. 55, pp 263 – 294.
• MacDougal,G.D.A.(1960) “The Benefits and Costs of Private Investment from Abroad :A Theoretical Approach” Economic Record27, 13-15.
• McKinnon , R.I (1964) “Foreign Exchange Constraints in Economic Development and Efficient Aid Allocation” Economic Journal74:388-409.
• McKinnon, R.I.(1973) “Money and Capital in Economic Development”, Washington D.C, The Brookings Institution.
• McKinnon RI and H W Pill, (1998), “The Overborrowing Syndrome: Are East Asian Economies Different?” in R Glick (ed),Managing Capital Flows and Exchange Rates: Perspectives From the Pacific Basin, Cambridge University Press, Cambridge, pp 322- 355.
• Mathieson, Donald J. and L. Rojas Suarez (1993), “ Liberalization of the Capital Account : Experience and Issues”, IMF OP, 103, IMF Washington D.C.
• Nehru, Vikram and Ashok Dhareshwar (1994) “New Estimates of Total Factor Productivity for Developing and Industrial Countries” World Bank Policy Research Working Paper no 1313, The World Bank, Washington.
• O’Donnel Barry (2001) “Financial Openness and Economic Performance”, unpublished thesis, Dublin Ireland, trinity College.
• Obstfeld, Maurice(1994), “Risk –Taking, Global Diversification and Growth”, American Economic Review, 84(5), pp1310 –1329.
• Quinn, Dennis (1997) “The Correlates of Change in International Financial Regulation” American Political Science Review,Vol 91 (3): 531- 551.
• Reisen, Helmut (1998) “Net Capital Inflows : How Much to Accept, How Much to Resist” in Reuven Glick ed Managing Capital Flows and Exchange Rates – Perspectives From the Pacific Basin, Cambridge University Press.
• Rodrik, Dani (1998) “Who Needs Capital Account Convertibility?” in Should the IMF Pursue Capital Account Convertibility?Princeton Essays in International Finance No.207, Princeton University, Department of Economics, International Finance Section, Princeton, NJ.
• Romer, PM (1990), “Endogenous Technological Change”, Journal of Political Economy, 98(5), Part 2, S71 – S102.
• Sargan J.D and Bhargava A (1983) “Testing Residuals from Least Square Regression for being generated by Gaussian Random Walk”, Econometrica, Vol 51, pp 153 –174.
• Shaw, Edward S (1973), “Financial Deepening in Economic Development” (New York: Oxford University Press).
• Swank, Duane (1998) “Funding the Welfare State: Globalisation and the Taxation of Business in Advanced Market Economies”.Political Studies, 46(4): 671 – 692.
• Wang, JW (1990), “Growth, Technology Transfer and the Long –run Theory of International Capital Movement”, Journal of International Economics, 29, pp 255 –271.
• Bekaert, Geert, Campbell Harvey, and Christian Lundblad (2001) “Does Financial Liberalization Spur Growth ?” NBER Working Paper No 8245, Cambridge, Massachusets.
• Chanda A.(2001) “The Influence of Capital Controls on long run Growth: Where and How Much?”, unpublished, Providence, Rhode Island: Brown University.
• Chenery and Bruno (1962) “Development Alternatives in an Open Economy: The Case of Israel” Economic Journal 57: 79- 103.
• Diaz- Alejandro,Carlos (1985), “Goodbye Financial Repression, Hello Financial Crash”, Journal of Development Economics, 19, pp 1-24.
• Dooley M P, (1994), “ Are Capital Inflows to Developing Countries a Vote For or Against Economic Policy Reforms?”, University of California, Santa Cruz, Working Paper No 295.
• Edwards, Sebastian (2001) “Capital Mobility and Economic Performance: Are Emerging Economies Different” NBER Working Paper no 8076, NBER, Massachusetts, Cambridge.
• Grossman G M and E Helpman (1991), “Innovation and Growth in the Global Economy” MIT Press, Cambridge.
• Gurley ,J.G and E.S Shaw (1960) “Financial Aspects of Economic Development”, Asian Economic Review,45, September, pp 515-33.
• Guttentag J M and R J Herring,(1985) “Disaster Myopia in International Banking” , Brookings Papers in International Economics, No 31.
• Kemp, M.C. (1961) “Foreign Investment and National Advantage” Economic Record, 28, 56 –62.
• Klein ,Michael and Giovanni Olivei (1999) “Capital Account Liberalization, Financial Depth and Economic Growth” NBER Working Paper 7834, Cambridge Massachusets.
• Kraay,Aart, (1998) “In Search of the Macro-economic Effects of Capital Account Liberalization”, unpublished, The World Bank, Washington.
• Lane, Philip R., and Giani Maria Milesi-Ferreti, (2001) “The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Nations,” Journal of International Economics, Vol. 55, pp 263 – 294.
• MacDougal,G.D.A.(1960) “The Benefits and Costs of Private Investment from Abroad :A Theoretical Approach” Economic Record27, 13-15.
• McKinnon , R.I (1964) “Foreign Exchange Constraints in Economic Development and Efficient Aid Allocation” Economic Journal74:388-409.
• McKinnon, R.I.(1973) “Money and Capital in Economic Development”, Washington D.C, The Brookings Institution.
• McKinnon RI and H W Pill, (1998), “The Overborrowing Syndrome: Are East Asian Economies Different?” in R Glick (ed),Managing Capital Flows and Exchange Rates: Perspectives From the Pacific Basin, Cambridge University Press, Cambridge, pp 322- 355.
• Mathieson, Donald J. and L. Rojas Suarez (1993), “ Liberalization of the Capital Account : Experience and Issues”, IMF OP, 103, IMF Washington D.C.
• Nehru, Vikram and Ashok Dhareshwar (1994) “New Estimates of Total Factor Productivity for Developing and Industrial Countries” World Bank Policy Research Working Paper no 1313, The World Bank, Washington.
• O’Donnel Barry (2001) “Financial Openness and Economic Performance”, unpublished thesis, Dublin Ireland, trinity College.
• Obstfeld, Maurice(1994), “Risk –Taking, Global Diversification and Growth”, American Economic Review, 84(5), pp1310 –1329.
• Quinn, Dennis (1997) “The Correlates of Change in International Financial Regulation” American Political Science Review,Vol 91 (3): 531- 551.
• Reisen, Helmut (1998) “Net Capital Inflows : How Much to Accept, How Much to Resist” in Reuven Glick ed Managing Capital Flows and Exchange Rates – Perspectives From the Pacific Basin, Cambridge University Press.
• Rodrik, Dani (1998) “Who Needs Capital Account Convertibility?” in Should the IMF Pursue Capital Account Convertibility?Princeton Essays in International Finance No.207, Princeton University, Department of Economics, International Finance Section, Princeton, NJ.
• Romer, PM (1990), “Endogenous Technological Change”, Journal of Political Economy, 98(5), Part 2, S71 – S102.
• Sargan J.D and Bhargava A (1983) “Testing Residuals from Least Square Regression for being generated by Gaussian Random Walk”, Econometrica, Vol 51, pp 153 –174.
• Shaw, Edward S (1973), “Financial Deepening in Economic Development” (New York: Oxford University Press).
• Swank, Duane (1998) “Funding the Welfare State: Globalisation and the Taxation of Business in Advanced Market Economies”.Political Studies, 46(4): 671 – 692.
• Wang, JW (1990), “Growth, Technology Transfer and the Long –run Theory of International Capital Movement”, Journal of International Economics, 29, pp 255 –271.
How to Cite
Varma, Sumati. 2010. “CAPITAL MOBILITY AND GROWTH IN THE DEVELOPING WORLD : An Empirical Investigation”. Studies in Business and Economics 15 (2). https://doi.org/10.29117/sbe.2010.0054.
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Articles