Do current and capital account liberalizations affect economic growth in the long run?

Abstract

We investigate the long-run relationship between de jure trade openness and economic growth as well as between de jure financial openness and economic growth for a panel of 118 developed and developing countries in the period 1970–2017. We fit a cross-sectional autoregressive distributed lag model and unveil the positive association between both liberalizations and economic growth in the global panel and for the more developed countries. Conversely, only trade liberalization is linked with larger output growth in less developed nations. We complement these results with a long-run causality analysis, which reveals that for the whole sample and for the two subsamples both de jure trade and de jure financial openness jointly cause economic growth. These outcomes may be indicative that during the time span under scrutiny developing countries faced current account crises when they stuck to the early prescriptions of the Washington Consensus. Yet, they later adopted a more nuanced view of economic liberalism putting in place a number of capital controls, which protected them from sudden stops and capital reversals.