Economic Growth and Financial Liberalization

By Bekaert, Geert; Harvey, Campbell R. | NBER Reporter, Spring 2001 | Go to article overview

Economic Growth and Financial Liberalization


Bekaert, Geert, Harvey, Campbell R., NBER Reporter


From 1980 to 1997, Chile experienced average real GDP growth of 3.8 percent per year while the Ivory Coast had negative real growth of 2.4 percent per year. Why? Attempts to explain differences in economic growth across countries have taken center stage in the macroeconomic literature again. [1] Although there is no agreement on what determines economic growth, most of the literature points out evidence of conditional convergence. Poorer countries grow faster than richer countries, once it is taken into account that poor countries tend to have lower long-run per capita GDP, for example, because of the poor quality of their capital stock (both physical and human). Jeffrey Sachs and Andrew Warner [2] have argued that policy choices, such as respect for property rights and open international trade, are important determinants of long-run growth.

Campbell R. Harvey [*]

There are some interesting differences between the two countries we mentioned. First, the Ivory Coast has a larger trade sector than Chile, but the role of trade openness remains hotly debated. [3] Second, Chile liberalized its capital markets, in particular its equity market, to foreign investment in 1992. After the liberalization, it grew by 6.4 percent a year. The 1980s and 1990s witnessed a number of financial liberalizations. Given the recent currency crises and their adverse economic consequences, what is the role of financial liberalizations and foreign capital flows in the economic welfare of developing countries? What effect did they have on growth? Our recent work with Christian Lundblad tries to answer this question.

Why Would Financial Liberalization Affect Economic Growth?

There are a number of channels through which financial liberalization may affect growth. First, foreign investors, enjoying improved benefits of diversification, will drive up local equity prices permanently, thereby reducing the cost of capital. We and Peter Henry [4] show that the cost of capital goes down after major regulatory reforms. Writing with Robin L. Lumsdaine, [5] we also show that a capital inflow leads to a permanent positive effect on equity prices. Moreover, our work and Henry's [6] indicates that investment increases. If this additional investment is efficient, then economic growth should increase. However, in the aftermath of the recent crises some economists feel that foreign capital has been wasted on frivolous consumption and inefficient investment, undermining the benefits of financial liberalization.

Second, there is now a large literature on how improved financial markets and intermediation can enhance growth [7] and how financial liberalization may promote financial development. Furthermore, foreign investors may also demand better corporate governance to protect their investments, reducing the wedge between the costs of external and internal financial capital, and further increasing investment. [8]

Measuring the Liberalization Effect on Economic Growth

Most of the literature on growth implements purely cross-sectional techniques for measuring growth. The nature of our question forces us to introduce a temporal dimension into the econometric framework. In work with Lundblad, [9] we propose a time series panel methodology that fully exploits all the available data to measure how much a financial liberalization increases growth. We regress future growth (in logarithmic form), averaged over periods ranging from three years to five years, on a number of predetermined determinants of long-run steady state per capita GDP, including secondary school enrollment, the size of the government sector, inflation, and trade openness, and on initial GDP (measured in logarithms) in 1980. The right-hand side variables also include an indicator of liberalization based primarily on the analysis of regulatory reforms in our most recent work. [10]

To maximize the time-series content in our regressions, we use overlapping data. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Economic Growth and Financial Liberalization
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.