Capital Account Liberalization and Growth: Was Mr. Mahathir Right?

44 Pages Posted: 10 Jan 2003 Last revised: 27 Jul 2007

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

David A. Leblang

University of Virginia; University of Virginia - College of Arts and Sciences; University of Virginia - Woodrow Wilson Department of Politics; University of Virginia - Frank Batten School of Leadership and Public Policy

Date Written: January 2003

Abstract

Much 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.

Suggested Citation

Eichengreen, Barry and Leblang, David A., Capital Account Liberalization and Growth: Was Mr. Mahathir Right? (January 2003). NBER Working Paper No. w9427, Available at SSRN: https://ssrn.com/abstract=366464

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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David A. Leblang

University of Virginia ( email )

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University of Virginia
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University of Virginia - College of Arts and Sciences ( email )

VA
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University of Virginia - Woodrow Wilson Department of Politics ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

University of Virginia - Frank Batten School of Leadership and Public Policy ( email )

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P.O. Box 400893
Charlottesville, VA 22904-4893
United States

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