Do Developing Countries Need ‘Good’ Institutions and Policies and Deep Financial Markets to Benefit from Capital Account Liberalization?

Posted: 15 Feb 2010

See all articles by Andrew van Hulten

Andrew van Hulten

affiliation not provided to SSRN

Michael Webber

affiliation not provided to SSRN

Abstract

This article critically evaluates the argument that, if developing countries had better institutions and policies and deeper financial markets, they would receive a boost to growth from capital account liberalization. The existing empirical record is ambiguous and leaves unanswered many of the important questions facing policy-makers. To test some predictions driving the case for capital account liberalization in developing countries, this article investigates the relationship between net capital inflows and medium-term economic growth within a sample of rich, institutionally advanced economies between 1984 and 2004. No evidence of a strong or statistically robust relationship between net capital inflows and future economic growth is found. On the contrary, the evidence suggests that net capital inflows are more strongly associated with past economic growth than with future economic growth. This result implies that capital account liberalization is not likely to boost growth, even among countries with the most appropriate institutions and policies.

Keywords: capital account liberalization, financial globalization, Minsky, economic growth

JEL Classification: F21, F36, F43

Suggested Citation

van Hulten, Andrew and Webber, Michael, Do Developing Countries Need ‘Good’ Institutions and Policies and Deep Financial Markets to Benefit from Capital Account Liberalization?. Journal of Economic Geography, Vol. 10, No. 2, pp. 283-319, 2010, Available at SSRN: https://ssrn.com/abstract=1551710 or http://dx.doi.org/lbp013

Andrew Van Hulten (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Michael Webber

affiliation not provided to SSRN ( email )

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