Opposition to Capital Market Opening

Abstract:     
We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners' and workers' consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists' losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening.

Number of Pages in PDF File: 30

Keywords: Capital flows, international …nancial integration, growth, neoclassical model, heterogenous agents

JEL Classification: F2, F3, F43, E13, E25, O11

working papers series