Monday, December 28, 2009

Research confirms that capital account liberalisation hinders growth in poorer countries

Mark Herkenrath of AllianceSud (Switzerland) draws our attention to a new working paper originating from the IMF Research Department (but note "not to be reported as representing the views of the IMF") which shows that capital account liberalization has no statistically significant effect on economic growth. In other words, while capital controls may be crucial in preventing contagion from external economic crises, they do not seem to hinder economic growth in non-crisis times:

no clear changes in economic growth take place in the years following trade or capital account reforms

More importantly, table 4 on page 35 of the paper shows that in low income countries, there is a statistically significant negative effect of capital account liberalization on growth:

Interestingly, trade liberalization has no effect on low-income country growth in general, but a negative effect in formerly socialist LICs. Not surprisingly, the text does not mention these extraordinary findings. But they will be of great use for advocacy work for the abolition of capital control restrictions and against trade liberalization.

The paper can be downloaded here. Be warned, however, that the paper is very poorly written and its authors seem oblivious of the fact that the financial reforms (read 'de-regulation') of the past thirty years have caused an explosion of unsustainable debt and an economic crisis of unparalleled proportions.


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