Does Capital Account Liberalization Lead to Growth?

Abstract

We test whether capital account liberalization led to higher economic growth using de jure measures of capital account and financial current account openness for 94 nations, from 1950 (or independence) onward. We argue that measurement error, differing time periods used, and collinearity among independent variables account for conflicting results in prior scholarship. We use pooled time-series, cross-sectional OLS and system GMM estimators toexamineeconomicgrowthrates,1955‐2004.Capitalaccountliberalizationhadapositive association with growth in both developed and emerging market nations. We confirm that equity market liberalization has an independent effect on economic growth. (JEL F02, F43, P16) In this paper, we reexamine the effects of capital account liberalization on economic growth in the context of addressing the inconsistent and widely diverging results that have been reported in the scholarly literature over the last decade. (See the comprehensive review essays on the topic by Eichengreen, 2001 and Kose et al., 2006; henceforth KPRW.) We strive to untangle the reasons behind this inconsistency, and to situate our results in the broader literature on finance and growth. • We propose that conflicting prior results are associated in part with measurement error in capital account variables. We offer a new dataset that contains more precise de jure measures of capital account regulation for a wide sample of countries (94) for up to 50 years (1950 to 1999). The