Effects Of Capital Account Liberalization Research Articles

Capital account liberalization and growth: was Mr. Mahathir right?

AbstractMuch ink has been spilled over the connections between capital account liberalization and growth. One reason that previous studies have been inconclusive, we show, is their failure to account for the impact of crises on growth and for the capacity of controls to limit those disruptive output effects. Accounting for these influences, it appears that controls influence macroeconomic performance through two channels, directly (what we think of as their positive impact on resource allocation and efficiency) and indirectly (by limiting the disruptive effects of crises at home and abroad). Because these influences work in opposite directions, it is not surprising that previous studies, in failing to distinguish between them, have been unable to agree whether the effect of controls tilts one way or the other. And because vulnerability to crises varies across countries and with the structure and performance of the international financial system, it is not surprising that the effects of capital account liberalization on growth are contingent and context specific. We document these patterns using two entirely different data sets: a panel of historical data for 21 countries covering the period 1880–1997, and a wider panel for the post‐1971 period like that employed in other recent studies. Copyright © 2003 John Wiley & Sons, Ltd.

Endogenous Financial Intermediation and Real Effects of Capital Account Liberalization

We consider lending and investment under asymmetric information in a small, developing economy. We allow different forms of financing contracts to arise endogenously in the credit market. Financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring and liquidation. We then examine the impact of opening the capital account on both welfare and the structure of lending contracts. Depending on the quality and cost of the monitoring technology, liberalizing the capital account may improve or worsen the efficiency of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. Efficient financial intermediaries are neither necessary nor sufficient for a capital account liberalization to improve welfare.

Capital Account Liberalization and Economic Performance: Survey and Synthesis

This paper reviews the literature on the effects of capital account liberalization and stock market liberalization on economic growth. 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. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with others that simply capture whether or not controls are present. Our review of the literature shows the contrasting results that have been obtained. These differences may reflect differences in country coverage, sample periods and indicators of liberalization. In order to reconcile these differences, we present new estimates of the effects on growth of capital account liberalization and stock market liberalization. We find some support for a positive effect of capital account liberalization on growth, especially for developing countries.

Capital Account Liberalization and Economic Performance: Survey and Synthesis

This paper reviews and discusses issues involved in assessing the relationship between capital account liberalization and economic performance. First, it discusses the different measures of restrictions used in the literature. Second, it reviews the literature on the relationship between growth and capital account liberalization. Finally, it identifies and explains some of the differences in the results of the various studies and provides some support for a positive effect of capital account liberalization on growth, especially for developing countries.

International Financial Liberalization, Corruption, and Economic Growth

This paper examines the effects of capital account liberalization on the long‐run growth of a developing economy. A general‐equilibrium, endogenous growth model is constructed in which corruption forms an integral part of the governance system of the country. By undermining the profitability of innovations, corruption lowers the rate of return to capital and reduces the rate of technological change. The impact of international financial liberalization on long‐run growth in this model can be either positive or negative. A drop in growth is obtained when the level of corruption is high enough to cause domestic rates of return to capital before liberalization to drop below those in the rest of the world. In this case, liberalization generates capital outflows, which act as a constraining force on innovation, reducing the rate of technological change and lowering output growth. On the other hand, if the level of corruption is sufficiently low, the capital account liberalization will serve as a boost to the country’s technical change and growth.

The Development of Financial Intermediation and Real Effects of Capital Account Liberalization

We consider lending and investment under asymmetric information in an emerging economy. We allow for different forms of Þnancial contracts to arise endogenously in the credit market. We examine the impact of opening the capital account on both aggregate output level and the structure of lending arrangements. Financial intermediaries mitigate the moral hazard problem in investment choice through costly monitoring all projects and liquidating risky, negative NPV projects. Depending on the quality and cost of the monitoring technology, opening the capital account may strengthen or weaken the role of Þnancial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. Our results suggest situations where limiting the capital insow or outsow may be necessary to avoid an aggregate risk shift and the collapse of the Þnancial intermediation sector.

Macroeconomic Effects of Capital Account Liberalization Based on the Neoclassical Growth Model (Written in Korean)

Macroeconomic Effects of Capital Account Liberalization Based on the Neoclassical Growth Model (Written in Korean)