International Finance and Growth in Developing Countries
Despite an abundance of cross-section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of international finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness. A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross?border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial for developing countries. The reforms developing countries need to carry out to make their economies safe for international asset trade are the same reforms they need to carry out to curtail the power of entrenched economic interests and liberate the economy's productive potential.
Summary: | Despite an abundance of cross-section,
panel, and event studies, there is strikingly little
convincing documentation of direct positive impacts of
financial opening on the economic welfare levels or growth
rates of developing countries. The econometric difficulties
are similar to those that bedevil the literature on trade
openness and growth, though if anything, they are more
severe in the context of international finance. There is
also little systematic evidence that financial opening
raises welfare indirectly by promoting collateral reforms of
economic institutions or policies. At the same time, opening
the financial account does appear to raise the frequency and
severity of economic crises. Nonetheless, developing
countries continue to move in the direction of further
financial openness. A plausible explanation is that
financial development is a concomitant of successful
economic growth, and a growing financial sector in an
economy open to trade cannot long be insulated from
cross?border financial flows. This survey discusses the
policy framework in which financial globalization is most
likely to prove beneficial for developing countries. The
reforms developing countries need to carry out to make their
economies safe for international asset trade are the same
reforms they need to carry out to curtail the power of
entrenched economic interests and liberate the
economy's productive potential. |
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