Financial Openness and Productivity
World Development, Vol. 39, No. 1, pp. 1-19, May 2010
32 Pages Posted: 21 Oct 2011 Last revised: 4 Jul 2013
Date Written: May 1, 2010
Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization. We also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.
The final working paper version of our paper is available here.
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