Journal of Economic Geography Advance Access published online on April 2, 2009
Journal of Economic Geography, doi:10.1093/jeg/lbp013
Do developing countries need ‘good’ institutions and policies and deep financial markets to benefit from capital account liberalization?
*Centre for Strategic Economic Studies, Victoria University, 300 Flinders Street, Melbourne, Australia, 3000. email <Andrew.Van-Hulten{at}vu.edu.au>
**School of Resource Management and Geography, The University of Melbourne, Victoria, Australia 3010.
F21, F36, F43
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
Date submitted: 7 November 2008
Date accepted: 3 March 2009