Catching Up by Deglobalization: Capital Account Policy and Economic Growth

42 Pages Posted: 30 Jan 2020

See all articles by Woo Jin Choi

Woo Jin Choi

Korea Development Institute; University of Virginia - Department of Economics

Ju Hyun Pyun

Korea University Business School (KUBS)

Date Written: December 15, 2019

Abstract

We examine the role of capital account policy pertaining to productivity growth and labor allocation at the sectoral level. Using panel data from 45 countries from 1985–2012, we find that capital controls combined with reserve accumulation — strategic capital account policy — contribute to the real GDP (TFP) growth through the enhancement of labor productivity in the manufacturing sector. While conventional wisdom shows a mixed result of capital account restriction on economic growth, we claim that the effect of closed capital account is positive if accompanied with large reserve hoardings. Second, we show that the policy is strongly associated with a larger scale with regard to the manufacturing sector. Our work is consistent with the hypothesis of growth through reallocation, as in Rodrik (2008); reserve accumulation combined with capital controls devalues real exchange rates and reallocates the labor to the manufacturing sector. As learning-by-doing externality comes with the scale of the manufacturing sector, the combined policy facilitates long-running productivity growth.

Keywords: foreign exchange reserves, capital control, emerging economies, resource reallocation, dynamic panel estimation

JEL Classification: C23, E58, F21, F31, F41

Suggested Citation

Choi, Woo Jin and Pyun, Ju Hyun, Catching Up by Deglobalization: Capital Account Policy and Economic Growth (December 15, 2019). Available at SSRN: https://ssrn.com/abstract=3516385 or http://dx.doi.org/10.2139/ssrn.3516385

Woo Jin Choi (Contact Author)

Korea Development Institute ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

University of Virginia - Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
Charlottesville, VA 22904-418
United States

Ju Hyun Pyun

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
30
Abstract Views
223
PlumX Metrics