Michael Klein from Tufts is arguing that it is middle-income countries that have the most to gain from capital-account openness. The underlying argument appears to be that truly poor countries lack the institutional and educational infrastructure necessary for foreign investment to produce truly valuable growth-enhancing spillovers, and that capital-account openness may encourage kleptocracy as well; while rich countries already have everything they need to take advantage of modern industrial technologies.
Yet another thing to put into the "reread in my copious spare time..." pile...
Posted by DeLong at February 22, 2003 12:12 PM | TrackBackCapital Account Openness and the Varieties of Growth Experience: he effects of capital account openness on economic growth may vary across countries. Some countries may not have in place the constellation of institutions required to fully benefit from open capital accounts. Other countries may realize only small marginal improvements in the wake of capital account liberalization. This paper presents evidence of an inverted-U shaped relationship between the responsiveness of growth to capital account openness and income per capita. Middle-income countries benefit significantly from capital account openness. However, neither rich nor poor countries exhibit statistically significant positive effects...
I confess to being too stingy to pay to read Klein's full paper at the NBER website, but I'm rather skeptical. It is more accurate to say that only a specific type of middle-income country stands to gain from capital account (Brad, you need to start saying "financial account" to show your credentials as an up-to-date economist...) openness. The type of country which could benefit from external capital flows is one that: (1) has obsessively tight prudential regulations in order to make sure that most banks' balance sheets stay healthy at all times; this precludes cronyism in all its forms, (2) has a squeaky-clean reputation for corruption which makes it likely it will attract a greater percentage of FDI flows as opposed to volatile short-term debt flows, and (3) is not obsessed with price stability to the point that it imposes a rigid, deflationary exchange rate regime such as Argentina's currency board.
To use just one example, Chile is today the sort of country which meets this bill, but it did not in the 1970's when the Chicago Boys first pushed capital account openness. The consequences-- drastic capital flight, bankruptcies right and left, and unemployment in excess of 20% in 1983-- were altogether too high, especially considering that the main engine of Chile and most other middle-income countries growth--exports--are not really dependent on positive net capital inflows.
My bet is that most middle-income countries today resemble Chile, Mexico, Argentina, Thailand, South Korea, Russia, and Turkey before their financial crises than they do countries like Taiwan which have never suffered adverse consequences. I'm with Dani Rodrik on this one--financial account openness is highly overrated.
Posted by: andres on February 22, 2003 10:47 PMAndres fine comment bears expanding....
And, I did read the full text.
Why is it that almost no economist seems to know that she or he could learn a lot by looking at the experiences of coutries in southern Africa? There are 44 southern African countries, of distinct experiences, by the way. Africa is important, darn it.
Botswana would echo the important experience of Chile, and could be well compared to Namibia. South Africa is also an especially instructive test case that might have changed conclusions in the paper.
Posted by: anne on February 23, 2003 07:26 AMEveryone knows the single greatest cause of economic stagnation around the world is corruption/cronyism, and yet we continue to put the cart before the horse and push for things like financial account openness before the institutions are in place to preserve the integrity that financial account openness requires.
Posted by: Dan on February 23, 2003 09:58 AMDan, you're right.
The counter often made is that the prudence of foreign investors is such that they won't invest in corruption, and hence financial account openness provides incentives for honesty. It thus creates its own efficient institutions.
Chile is the stand-out case for this argument. But it's a very, very risky strategy IMO.
Posted by: derrida derider on February 23, 2003 02:33 PMDan, you're right.
The counter often made is that the prudence of foreign investors is such that they won't invest in corruption, and hence financial account openness provides incentives for honesty. It thus creates its own efficient institutions.
Chile is the stand-out case for this argument. But it's a very, very risky strategy IMO.
Posted by: derrida derider on February 23, 2003 02:34 PM