On the Growth Effect of Liberalizations

Abstract

Using panel data on industries in emerging markets, we investigate the effect of stock market liberalizations on industrial growth. Our paper makes the following methodological contributions: First, we address the potential endogeneity of stock market liberalization using fixed effects, instrumental variable, and dynamic generalized method of moment specifications. Second, we contruct new measures to distinguish between the external dependence and growth opportunities hypotheses about the mechanism by which liberalization is likely to affect growth. Third, to isolate the impact of liberalization we collect new data to control for contemporaneous economic reforms, including privatization, macroeconomic stabilization, and trade liberalization. Result from the fixed-effects specifications suggest that both industries that are technologically more dependent on external sources of finance, and industries that face better growth opportunities, grow significantly faster following liberalization. However, when liberalization is treated as endogenous then growth opportunities no longer have a significant impact on industrial growth. This suggests that countries may time liberalizations to coincide with better industry growth opportunities.

Keywords: Stock market liberalization, emerging markets, economic growth