## _wp16252

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---

### Introduction
- Purpose: construct a de jure capital account openness index (Wang-Jahan index) to assess associations between de jure policies and de facto capital flows.
- Motivations:
  - Existing indices have limited country coverage, particularly for low-income developing countries (LIDCs).
  - Existing indices often lack adequate information on controls for various categories of capital flows.
  - Need for a longer time-series to show trends and capture recent changes.
- Scope of the Wang-Jahan index:
  - Covers 164 countries, of which 51 are LIDCs.
  - Provides information on 12 types of asset categories.
  - Period covered: 1996–2013.
- Key policy questions motivating the work:
  - Can LIDCs control their international financial market integration?
  - Has increased de facto integration been accompanied by increased de jure openness?
  - How can LIDCs best handle consequences of increased cross-border capital flows?

### Methodology and comparison with existing indices
- Data source:
  - Index constructed using information contained in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
- Comparison highlights:
  - Chinn-Ito:
    - Combines four AREAER categories.
    - Coverage: 182 countries covering 1970–2013.
    - Limitation: does not provide prevalence of capital controls on specific types of capital flows; does not provide information on direction of flows or residency.
  - Schindler (2009):
    - Focuses on capital account transactions; uses six of AREAER’s twelve sub-categories.
    - Coverage: 91 countries covering 1995–2005; LIDC coverage: 15 countries.
  - Klien (2012):
    - Updates Schindler’s index; coverage limited to 44 countries over 2006–2010.
  - Fernandez et al. (2015):
    - Covers ten categories of assets; expanded coverage by nine countries over 1995–2013; LIDC coverage: 19 countries.
  - Quinn (1997, 2013):
    - Ranks intensity of controls; does not differentiate inflows vs outflows or sub-categories.
- Wang-Jahan construction highlights:
  - Builds on Schindler’s index by increasing country coverage and adding missing sub-categories.
  - Coding rule: strictly follow AREAER records (binary coding; no intensity weights).

### Coding methodology for capital account controls
- AREAER presentation:
  - Each of twelve sub-categories in three columns: sub-category name; YES/NO/no entry (Yes indicates a restriction is in place); short narrative on the controls.
- Coding rule:
  - Binary code: 0 for restricted and 1 for fully open based on the second column.
  - The narrative (third column) used only to verify or correct clear errors (e.g., second column reports NO because the market does not exist).
  - Narrative not used to form judgments on intensity.
- Exceptions and adjustments:
  - Controls placed for political or national security reasons are disregarded following Chinn-Ito (2011).
  - This modification altered 98 observations out of 1044 observations after 2005 and affected only 14 high income countries (income per capita above $10,000 in 2005).

### Asset categories and sub-components (database structure)
- Main asset-category codes (average liberalization index where given):
  - ka_eq Average equity liberalization (1=fully liberalized)
    - eq_plbn Purchase locally by nonresidents (equity)
    - eq_siln Sale or issue locally by nonresidents (equity)
    - eq_pabr Purchase abroad by residents (equity)
    - eq_siar Sale or issue abroad by residents (equity)
  - ka_bo Average bond liberalization (1=fully liberalized)
    - bo_plbn, bo_siln, bo_pabr, bo_siar
  - ka_mm Average money market liberalization (1=fully liberalized)
    - mm_plbn, mm_siln, mm_pabr, mm_siar
  - ka_ci Average collective investment liberalization (1=fully liberalized)
    - ci_plbn, ci_siln, ci_pabr, ci_siar
  - ka_dr Average derivative investment liberalization (1=fully liberalized)
    - dr_plbn, dr_siln, dr_pabr, dr_siar
  - ka_cc Average commercial credit liberalization (1=fully liberalized)
    - cc_in Commercial credit inflow liberalization
    - cc_out Commercial credit outflow liberalization
  - ka_fc Average financial credit liberalization (1=fully liberalized)
    - fc_in Financial credit inflow liberalization
    - fc_out Financial credit outflow liberalization
  - ka_gu Average guarantee liberalization (1=fully liberalized)
    - gu_in Guarantee inflow liberalization
    - gu_out Guarantee outflow liberalization
  - ka_di Average direct investment liberalization (1=fully liberalized)
    - di_in Direct investment inflow liberalization
    - di_out Direct investment outflow liberalization
  - ka_ldi Direct investment liquidation liberalization (1=fully liberalized)
  - ka_ret Real estate capital transaction liberalization (1=fully liberalized)
  - ka_pct Personal capital transaction liberalization (1=fully liberalized)
- Further disaggregation:
  - Equity, Bonds, Money Market Instruments, Collective Investment, Derivatives: each split into four minor items (purchase locally by nonresidents; sale or issue locally by nonresidents; purchase abroad by residents; sale or issue abroad by residents).
  - Financial Credit and Direct Investment: disaggregated into inflows and outflows.
  - Liquidation of direct investment; Real estate transactions; Personal capital transactions: not further disaggregated.

### Aggregation methods and index construction
- Aggregation by asset category:
  - Unweighted averages of appropriate subcategories.
  - For assets with four binary subcategories (equity, bonds, money market, collective investment, derivatives), asset-specific aggregate openness index can take values: 0, 0.25, 0.5, 0.75, and 1.
  - For direct investment and financial credits (less disaggregated), aggregated index can take values: 0, 0.5 and 1.
  - For Liquidation of direct investment; Real estate transactions; Personal capital transactions: only 0 or 1.
- Aggregation by direction of flows:
  - Direct Investment and Financial Credits: indicators already by inflow/outflow and will be 0 or 1.
  - Liquidation of direct investment; Real estate transactions; Personal capital transactions: excluded for direction-based aggregation.
  - For remaining categories, inflows captured by aggregating Purchase locally by nonresidents and Sale or issue abroad by residents; outflows captured by aggregating Sale or issue locally by nonresidents and Purchase abroad by residents.
- Aggregation by residency:
  - Applicable to five asset categories: Equity, Bonds, Money Market Instruments, Collective Investment, Derivatives.
  - For nonresidents: aggregate Purchase locally by nonresidents (Inflow) and Sale or issue locally by nonresidents (Outflow).
  - For residents: aggregate Purchase abroad by residents (Outflow) and Sale or issue abroad by residents (Inflow).
- Alternative methods:
  - Principal component analysis was tested but highly correlated with the unweighted average; the un-weighted aggregation method was chosen.

### Treatment of missing data and conservative aggregation
- Conservative rules for LIDCs and missing information:
  - If any of the twelve asset types had missing information, the total aggregate index was not calculated (individual asset types and sub-categories still reported).
  - If a sub-category was missing, the team tried to fill the gap conservatively and coded it as “closed” if doing so did not create sudden jumps in the time series.
  - Missing information largely occurred early in the sample period; almost all countries have an aggregate index except a few small states (Dominica, Vanuatu, St. Kitts and Nevis, St. Vincent) or fragile situations (examples include Afghanistan, Sudan, Sierra Leone).
- Contrast with Fernandez et. al. (2015):
  - Fernandez et. al. (2015) sometimes provided aggregate indices despite substantial missing categories; Wang-Jahan avoids providing an aggregate index when substantial missing data exist and aggregates differently (does not aggregate based on residency as Fernandez et. al. does).

### Correlations with other indices
- Correlations of the Wang-Jahan index with other capital account openness indices (Table 2):
  - Emerging Markets:
    - Chinn and Ito (2011) 0.793
    - Schindler (2009) 0.942
    - Quinn (2007) 0.818
    - Fernandez et. al. (2015) 0.959
  - Low-income and developing countries:
    - Chinn and Ito (2011) 0.785
    - Schindler (2009) 0.965
    - Quinn (2007) NA
    - Fernandez et. al. (2015) 0.950
  - Frontier Economies:
    - Chinn and Ito (2011) 0.834
    - Schindler (2009) 0.981
    - Quinn (2007) NA
    - Fernandez et. al. (2015) 0.966
- Interpretation:
  - Wang-Jahan index is highly correlated with Schindler’s index and strongly correlated with Chinn-Ito.

### Stylized facts and empirical findings
- Cross-group openness:
  - EMs generally have more open capital accounts than LIDCs (excluding frontier economies) throughout the sample period.
  - Since 2007, frontier economies (a subset of LIDCs) have been as open as EMs—driven by openings in new frontier economies such as Papa New Guinea and Ghana.
- Disaggregation by asset type and residency:
  - Non-frontier LIDCs are less open than EMs in all asset types except FDI.
  - Non-frontier LIDCs are almost as open as EMs to non-resident flows but are almost closed for resident capital flows.
  - Non-frontier LIDCs have far fewer controls on capital inflows than on capital outflows (outflows nearly closed).
- Frontier economies heterogeneity:
  - Eight out of fourteen frontier economies have an index close to 0.7 and above (EM median is close to 0.7).
  - Country examples:
    - Uganda and Zambia open across almost all asset types since 1997.
    - Tanzania and Mozambique closed in almost all categories throughout the sample.
    - Ghana opened significantly in 2005.
    - Papua New Guinea fully lifted controls in 2007.
    - Bolivia has had an average close to 0.9 throughout the sample period.
- Movements over time:
  - Example: Rwanda achieved full capital account liberalization in 2010 with full liberalization occurring within a short period.
  - Many LIDCs have taken gradual steps toward opening the capital account.
- Co-movements:
  - Pair-wise correlations suggest simultaneous liberalization across various sub-categories.
  - Lowest correlations occur between foreign direct investment and other sub-categories.

### Gates vs Walls classification and implications
- Classification (Klein 2012):
  - Open: virtually no capital controls on any asset category over the sample period.
  - Wall: pervasive controls across all, or almost all, asset categories.
  - Gate: episodic controls imposed on narrower sets of assets.
- Quantitative thresholds:
  - “Open” countries: on average controls on less than 10 percent of transaction subcategories over the sample period and no years with controls on more than 20 percent of subcategories.
  - “Walls” countries: on average controls on more than 70 percent of transaction subcategories and no years with controls on less than 60 percent of subcategories.
  - “Gate” countries: neither Walls nor Open.
- Empirical patterns:
  - Majority of countries are Gates; a few LIDCs are Open (e.g., Zambia) or Walls (e.g., Bhutan).
  - Gate group has capital account openness index between Open and Wall and exhibits higher volatility of capital account openness than Open or Wall groups.
  - Some LIDCs fall into “other” due to inadequate data for classification.

### Regional differences (average of 1996-2013)
- Regional ranking summary:
  - South Asia (SA) has been the least liberalized region.
  - Latin America and Caribbean (LAC) is the most liberalized region for both LIDCs and EMs.
  - LIDCs in East Asia and the Pacific, and Latin America and the Caribbean are more open than EMs.
  - On average, little difference between LIDCs and EMs in sub-Saharan Africa in terms of de jure capital account openness.

### IV. De facto flows vs de jure capital account openness — Key findings
- Aggregate flows and openness:
  - The level of total capital flows to LIDCs has increased in the recent past.
  - The increase in total capital flows coincided with an increase in capital account opening for the frontier economies (comparison of pre and post 2007 capital flows and index data).
  - Capital account openness index for other LIDCs and EMs remained almost constant while there was an increase in capital flows to LIDCs and a decrease in capital flows to EMs.
- Interpretation:
  - Divergence illustrates that factors other than de jure capital control policies (push and pull factors) also play a role in capital flows.
  - Simple correlations between de facto capital flows and de jure capital account openness are inconclusive; country-specific analysis is important.

### Case studies — Uganda and Ghana
- Uganda:
  - July 1997: liberalized the capital account.
  - Prevailing conditions at liberalization: shallow financial sector, limited regulatory capacity.
  - Opening part of a broader package of market-oriented reforms.
  - No immediate increase in capital inflows after liberalization; volumes picked up substantially only after 2004.
  - Interpretation: opening alone was not sufficient to attract capital flows; push factors drove eventual inflows, though liberalization helped purchases of government securities by non-residents.
- Ghana:
  - Late 2005: liberalization began with the Foreign Exchange Act allowing non-residents to purchase domestic bond securities.
  - Liberalization sequenced with debt and stock market reforms, strengthening financial supervision and bank soundness.
  - Result: increased capital flows, domestic capital market development, and longer-term portfolio inflows.
  - Demonstrates that sequencing and complementary domestic reforms can produce tangible benefits from partial opening.

### V. Concluding remarks — Contributions and scope
- Gap addressed: less (and often fragmented) work exists on capital account openness in low-income countries; this paper fills that gap.
- Main contribution: computation and documentation of a new database of countries’ de jure controls on cross-border financial transactions based on AREAER.
- Methodology advantages:
  - Disaggregation by types of assets.
  - Analyzing openness by liberalization of inflows or outflows.
  - Distinguishing residents and non-residents.
- Expanded coverage:
  - covers 164 countries,
  - information on 12 types of asset categories,
  - over the period 1996–2013.
- Uses of the disaggregated index:
  - Assess macroeconomic and distributional consequences of de jure capital account openness.
  - Evaluate effectiveness of de jure openness policies by asset and liability category.
  - Analyze tradeoffs posed by changes in de jure openness (for example between promoting higher investment versus generating additional volatility).
- Future research: stated purpose includes assessing these policy questions.

### Annex — Definition of the 12 asset types in the capital account (index construction)
- Equity: Transactions involving shares and other securities of a participating nature, excluding investments for acquiring a lasting economic interest (foreign direct investment).
- Bond: Bonds or other debt securities with an original maturity of more than one year; includes notes and debentures.
- Money market: Securities with an original maturity of one year or less, including short-term instruments like certificates of deposits and bills of exchange.
- Collective Investment: Share certificates and registry entries or other evidence of investor in an institution for collective investment such as mutual funds and investment trusts.
- Derivatives and other instruments: Rights, warrants, financial options and futures; secondary market operations in other financial claims (including sovereign loans, receivables, and discounted bills of trade); forward operations; swaps of bonds and other debt securities; operations in foreign exchange without any other underlying transaction (spot or forward trading on the foreign exchange markets, forward cover operations).
- Commercial Credit: Operations directly linked with international trade transactions or with the rendering of international services.
- Financial Credit: Credits other than commercial credits granted by all residents, including banks to nonresidents or vice versa.
- Direct Investment: Investments for establishing lasting economic relations abroad by residents and domestically by non-residents (for example, producing goods and services and allowing investor participation in enterprise management).
- Direct Investment Liquidation: Transfer of principal, including initial capital and capital gains of a foreign direct investment as defined above.
- Guarantees: Guarantees, sureties, and financial backup facilities provided by residents to nonresidents and vice versa; includes securities pledged for payment or performance of a contract (warrants, performance bonds, standby letters of credit) and financial backup facilities used as a guarantee for independent financial operations.
- Real Estate: Acquisition of real estate not associated with direct investment, including investment of a purely financial nature in real estate or acquisition for personal use.
- Personal capital transaction: Transfers initiated on behalf of private persons to benefit other private persons; includes loans or settlements of debt in country of origin by immigrants, gifts and endowments, loans, inheritances and legacies, and emigrants' assets.

*Source: Annex Table 1. List of Countries Covered in the Wang-Jahan Database; Annex A definitions and excerpts from _wp16252.*

### Annex Table 1. List of Countries Covered in the Wang-Jahan Database 20

### Annex Table 1. List of Countries Covered in the Wang-Jahan Database

### Introduction
- Purpose: construct a de jure capital account openness index (Wang-Jahan index) to assess associations between de jure policies and de facto capital flows.
- Motivations for a new index:
  - Existing indices have limited country coverage, particularly for low-income developing countries (LIDCs).
  - Existing indices often lack adequate information on controls for various categories of capital flows.
  - Need for a longer time-series to show trends and capture recent changes.
- Scope of the Wang-Jahan index:
  - Covers 164 countries, of which 51 are LIDCs.
  - Provides information on 12 types of asset categories.
  - Period covered: 1996–2013.
- Key policy questions motivating the work:
  - Can LIDCs control their international financial market integration?
  - Has increased de facto integration been accompanied by increased de jure openness?
  - How can LIDCs best handle consequences of increased cross-border capital flows?

### Methodology and comparison with existing indices
- Data source:
  - Index constructed using information contained in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
- Comparison of prominent indices and their features:
  - Chinn-Ito index:
    - Combines four AREAER categories (FX regime, export proceeds, current account, capital account transaction).
    - Coverage: 182 countries covering 1970–2013.
    - Limitation: does not provide prevalence of capital controls on specific types of capital flows; does not provide information on direction of flows or residency.
  - Schindler (2009):
    - Focuses solely on capital account transactions.
    - AREAER disaggregates the capital account into twelve main sub-categories.
    - Schindler uses six of the twelve sub-categories for a composite openness index.
    - Coverage: 91 countries covering 1995–2005; very limited LIDC coverage (15 countries).
    - Limitation: does not include all subcategories; limited LIDC and time coverage.
  - Klien (2012):
    - Updates Schindler’s index to capture recent changes.
    - Coverage limited to 44 countries over 2006–2010.
  - Fernandez et al. (2015):
    - Updated and revised Schindler’s index covering ten categories of assets.
    - Expanded coverage by nine additional countries over 1995–2013.
    - LIDC coverage: 19 countries.
  - Quinn (1997, 2013):
    - Constructs a dataset that ranks intensity of controls by assumed economic importance of instruments.
    - Does not differentiate between capital inflows and outflows or between sub-categories of capital.
    - Approach not adopted in Wang-Jahan; Wang-Jahan coding strictly follows AREAER records and does not add an “intensity” component.
- Wang-Jahan index construction highlights:
  - Builds on Schindler’s index by increasing country coverage and adding missing sub-categories of assets.
  - Covers 164 countries, 51 LIDCs, 12 asset categories, period 1996–2013.
  - Coding rule: strictly follow AREAER records (no assumed intensity weights).

### Stylized facts and empirical observations (from the paper)
- General patterns for LIDCs:
  - LIDCs generally have closed capital accounts.
  - A subset of LIDCs (referred to as frontier economies) have been catching up to emerging markets (EMs) in embracing capital account openness.
- Sequencing and heterogeneity in opening:
  - No unique pattern of opening among LIDCs:
    - Some countries opened in a single step (example: Uganda; Papa New Guinea).
    - Others sequenced openings over time (example: Ghana).
- Association between de jure policy changes and de facto capital flows:
  - Countries have varying experiences with de facto capital flows following de jure openings.
    - Uganda opened its capital account in 1997 and did not see an immediate impact on de facto capital flows.
    - Ghana benefited from increased capital flows after opening its capital account.
  - Overall correlation between de facto capital flows and de jure policies towards capital account openness (or capital flow management measures) is weak.
  - Implication: other macroeconomic push and pull factors play a significant role in influencing capital flows.

### Structure of the rest of the paper (as organized)
- Section II: methodology in constructing the new de jure index and comparison with existing indices.
- Section III: stylized facts about the state of de jure capital account openness in LIDCs.
- Section IV: associations between the de jure index and de facto capital flows.
- Section V: conclusions and guidance on further applications of the index.

*Source: Annex Table 1. List of Countries Covered in the Wang-Jahan Database (excerpt).*

### Annex A for definitions). Information on each of the twelve sub-categories are presented in

### _wp16252 - Annex A for definitions)

### Coding methodology for capital account controls
- AREAER presents each of the twelve sub-categories in three columns: the first identifies the sub-category; the second reports YES, NO, or no entry (Yes indicates that a restriction is in place); the final column provides a short narrative on the controls.
- Coding rule used:
  - Binary code: 0 for restricted and 1 for fully open based on the answers in the second column.
  - The narrative in the third column is used only to verify or correct clear errors in the second column (for example, when the second column reports NO because the market does not exist).
  - The narrative in the third column is not used to form judgments on the intensity of capital controls.
- Exceptions and adjustments:
  - Following Chinn-Ito (2011), controls placed for political or national security reasons are disregarded.
  - This led to modifying 98 observations out of 1044 observations after 2005 and affected only 14 high income countries (income per capita above $10,000 in 2005).

### Asset categories and sub-components (database structure)
- Main asset-category codes (average liberalization index where given):
  - ka_eq Average equity liberalization (1=fully liberalized)
    - eq_plbn Purchase locally by nonresidents (equity)
    - eq_siln Sale or issue locally by nonresidents (equity)
    - eq_pabr Purchase abroad by residents (equity)
    - eq_siar Sale or issue abroad by residents (equity)
  - ka_bo Average bond liberalization (1=fully liberalized)
    - bo_plbn, bo_siln, bo_pabr, bo_siar (bond subcomponents)
  - ka_mm Average money market liberalization (1=fully liberalized)
    - mm_plbn, mm_siln, mm_pabr, mm_siar (money market subcomponents)
  - ka_ci Average collective investment liberalization (1=fully liberalized)
    - ci_plbn, ci_siln, ci_pabr, ci_siar (collective investment subcomponents)
  - ka_dr Average derivative investment liberalization (1=fully liberalized)
    - dr_plbn, dr_siln, dr_pabr, dr_siar (derivative subcomponents)
  - ka_cc Average commercial credit liberalization (1=fully liberalized)
    - cc_in Commercial credit inflow liberalization
    - cc_out Commercial credit outflow liberalization
  - ka_fc Average financial credit liberalization (1=fully liberalized)
    - fc_in Financial credit inflow liberalization
    - fc_out Financial credit outflow liberalization
  - ka_gu Average guarantee liberalization (1=fully liberalized)
    - gu_in Guarantee inflow liberalization
    - gu_out Guarantee outflow liberalization
  - ka_di Average direct investment liberalization (1=fully liberalized)
    - di_in Direct investment inflow liberalization
    - di_out Direct investment outflow liberalization
  - ka_ldi Direct investment liquidation liberalization (1=fully liberalized)
  - ka_ret Real estate capital transaction liberalization (1=fully liberalized)
  - ka_pct Personal capital transaction liberalization (1=fully liberalized)

- Further disaggregation:
  - Equity, Bonds, Money Market Instruments, Collective Investment, Derivatives: each split into four minor items (purchase locally by nonresidents; sale or issue locally by nonresidents; purchase abroad by residents; sale or issue abroad by residents).
  - Financial Credit and Direct Investment: disaggregated into inflows and outflows (two minor items).
  - Liquidation of direct investment; Real estate transactions; Personal capital transactions: not further disaggregated.

### Aggregation methods and index construction
- Aggregation by asset category:
  - Unweighted averages of appropriate subcategories.
  - For assets with four binary subcategories (equity, bonds, money market, collective investment, derivatives), the asset-specific aggregate openness index can take values: 0, 0.25, 0.5, 0.75, and 1.
  - For direct investment and financial credits (less disaggregated), the aggregated index can take values: 0, 0.5 and 1.
  - For Liquidation of direct investment; Real estate transactions; Personal capital transactions: only 0 or 1.
- Aggregation by direction of flows (inflows vs outflows):
  - Direct Investment and Financial Credits: indicators already by inflow/outflow and will be 0 or 1.
  - Liquidation of direct investment; Real estate transactions; Personal capital transactions: excluded for direction-based aggregation.
  - For remaining categories, inflows captured by aggregating Purchase locally by nonresidents and Sale or issue abroad by residents; outflows captured by aggregating Sale or issue locally by nonresidents and Purchase abroad by residents.
- Aggregation by residency:
  - Applicable to five asset categories: Equity, Bonds, Money Market Instruments, Collective Investment, Derivatives.
  - For nonresidents: aggregate Purchase locally by nonresidents (Inflow) and Sale or issue locally by nonresidents (Outflow).
  - For residents: aggregate Purchase abroad by residents (Outflow) and Sale or issue abroad by residents (Inflow).
- Alternative methods considered:
  - Principal component analysis was tested but highly correlated with the unweighted average. The un-weighted aggregation method was chosen.

### Treatment of missing data and conservative aggregation
- Conservative rules for LIDCs and missing information:
  - If any of the twelve asset types had missing information, the total aggregate index was not calculated (though all individual asset types and sub-categories were reported).
  - If a sub-category was missing, the team tried to fill the gap conservatively and coded it as “closed” if doing so did not create sudden jumps in the time series.
  - Missing information largely occurred early in the sample period; almost all countries have an aggregate index except a few small states (Dominica, Vanuatu, St. Kitts and Nevis, St. Vincent) or fragile situations (examples include Afghanistan, Sudan, Sierra Leone).
- Rationale and contrast with Fernandez et. al. (2015):
  - Fernandez et. al. (2015) sometimes provided aggregate indices for countries (e.g., Myanmar for 1995–2005) despite substantial missing categories; Wang-Jahan index avoids providing an aggregate index when substantial missing data exist.
  - Wang-Jahan also aggregates differently (does not aggregate based on residency as Fernandez et. al. does).

### Comparison with other indices (correlations)
- Correlations of the Wang-Jahan index with other capital account openness indices (Table 2):
  - Emerging Markets: Chinn and Ito (2011) 0.793; Schindler (2009) 0.942; Quinn (2007) 0.818; Fernandez et. al. (2015) 0.959
  - Low-income and developing countries: Chinn and Ito (2011) 0.785; Schindler (2009) 0.965; Quinn (2007) NA; Fernandez et. al. (2015) 0.950
  - Frontier Economies: Chinn and Ito (2011) 0.834; Schindler (2009) 0.981; Quinn (2007) NA; Fernandez et. al. (2015) 0.966
- Interpretation:
  - Wang-Jahan index is highly correlated with Schindler’s index and also strongly correlated with Chinn-Ito.

### Stylized facts and empirical findings
- Cross-group openness:
  - EMs generally have more open capital accounts than LIDCs (excluding LIDCs that are frontier economies) throughout the sample period.
  - Since 2007, frontier economies (a subset of LIDCs) have been as open as EMs—driven by openings in new frontier economies such as Papa New Guinea and Ghana.
- Disaggregation by asset type and residency:
  - Non-frontier LIDCs are less open than EMs in all asset types except FDI.
  - Non-frontier LIDCs are almost as open as EMs to non-resident flows but are almost closed for resident capital flows.
  - Non-frontier LIDCs have far fewer controls on capital inflows than on capital outflows (outflows nearly closed).
- Frontier economies heterogeneity:
  - Eight out of fourteen frontier economies have an index close to 0.7 and above (EM median is close to 0.7).
  - Examples: Uganda and Zambia open across almost all asset types since 1997; Tanzania and Mozambique closed in almost all categories throughout the sample; Ghana opened significantly in 2005; Papua New Guinea fully lifted controls in 2007.
  - Bolivia has had an average close to 0.9 throughout the sample period.
- Movements over time:
  - Examples of rapid liberalization: Rwanda achieved full capital account liberalization in 2010 with full liberalization occurring within a short period.
  - Many LIDCs have taken gradual steps toward opening the capital account.
- Co-movements across sub-categories:
  - Pair-wise correlations suggest simultaneous liberalization across various sub-categories.
  - Lowest correlations occur between foreign direct investment and other sub-categories, indicating FDI liberalization decisions differ from other types of capital flows.

### Gates vs Walls classification and implications
- Classification adopted (Klein 2012):
  - Open: virtually no capital controls on any asset category over the sample period.
  - Wall: pervasive controls across all, or almost all, asset categories.
  - Gate: episodic controls imposed on narrower sets of assets.
- Quantitative thresholds:
  - “Open” countries: on average controls on less than 10 percent of transaction subcategories over the sample period and no years with controls on more than 20 percent of subcategories.
  - “Walls” countries: on average controls on more than 70 percent of transaction subcategories and no years with controls on less than 60 percent of subcategories.
  - “Gate” countries: neither Walls nor Open.
- Empirical patterns:
  - Majority of countries are Gates; a few LIDCs are Open (e.g., Zambia) or Walls (e.g., Bhutan).
  - Gate group has capital account openness index between Open and Wall and exhibits higher volatility of capital account openness than Open or Wall groups.
  - Some LIDCs fall into “other” due to inadequate data for classification.

### Regional differences (average of 1996-2013)
- Regional ranking (summary finding):
  - South Asia (SA) has been the least liberalized region.
  - Latin America and Caribbean (LAC) is the most liberalized region for both LIDCs and EMs.
  - LIDCs in East Asia and the Pacific, and Latin America and the Caribbean are more open than EMs.
  - On average, little difference between LIDCs and EMs in sub-Saharan Africa in terms of de jure capital account openness.

*Source: _wp16252 - Annex A for definitions).*

### 1.  Colors reflect the world quintile of absolute values in each row, with red indicating the quintile with the

### _wp16252 - 1.  Colors reflect the world quintile of absolute values in each row, with red indicating the quintile with the

### IV. DE FACTO FLOWS VS DE JURE CAPITAL ACCOUNT OPENNESS — Key findings
- The level of total capital flows to LIDCs has increased in the recent past.
- The increase in total capital flows coincided with an increase in capital account opening for the frontier economies (comparison of pre and post 2007 capital flows and index data).
- Capital account openness index for other LIDCs and EMs remained almost constant while:
  - there was an increase in capital flows to LIDCs, and
  - a decrease in capital flows to EMs.
- This divergence illustrates that factors other than de jure capital control policies (push and pull factors) also play a role in capital flows.
- Simple correlations between de facto capital flows and de jure capital account openness are inconclusive; country-specific analysis is important.

### Case studies — Uganda and Ghana
- Uganda
  - July 1997: Uganda liberalized the capital account.
  - Prevailing conditions at liberalization: shallow financial sector, limited regulatory capacity.
  - Opening was part of a broader package of market-oriented reforms.
  - Uganda did not experience an immediate increase in capital inflows after liberalization; volumes started to pick up substantially only after 2004.
  - Interpretation: opening the capital account alone was not sufficient to attract capital flows; push factors drove the eventual inflows, though liberalization helped purchases of government securities by non-residents.
- Ghana
  - Late 2005: Liberalization began with the Foreign Exchange Act allowing non-residents to purchase domestic bond securities.
  - Liberalization occurred as part of coherent sequencing: debt and stock market reforms, strengthening financial supervision and bank soundness.
  - Result: increased capital flows, domestic capital market development, and longer-term portfolio inflows.
  - Demonstrates that sequencing and complementary domestic reforms can produce tangible benefits from partial opening.

### V. CONCLUDING REMARKS — Contributions and scope
- Gap addressed: Less (and often fragmented) work exists on capital account openness in low-income countries; this paper fills that gap.
- Main contribution: computation and documentation of a new database of countries’ de jure controls on cross-border financial transactions based on information in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions.
- Methodology: builds on Schindler (2009) with modifications; advantages include:
  - disaggregation by types of assets,
  - analyzing openness based on liberalization of inflows or outflows,
  - distinguishing residents and non-residents.
- Expanded coverage:
  - covers 164 countries,
  - information on 12 types of asset categories,
  - over the period 1996–2013.
- The Wang-Jahan index offers the most country coverage, particularly for low-income developing countries.
- The paper also analyzes the link between de jure capital account openness and de facto capital flows.
- The disaggregated index can be used to assess policy questions such as:
  - macroeconomic and distributional consequences of de jure capital account openness,
  - effectiveness of de jure openness policies by asset and liability category,
  - tradeoffs posed by changes in de jure openness (for example between promoting higher investment versus generating additional volatility).
- Assessing some of these questions is the stated purpose of future research.

### Data and sample notes
- The sample excludes small states and frontier economies.
- The index assigns a value of 0 (closed) or 1 (open) for each category based on a country’s de jure policy on controls on capital flows.

### Annex — Definition of the 12 asset types in the capital account (index construction)
- Equity: Transactions involving shares and other securities of a participating nature, excluding investments for acquiring a lasting economic interest (foreign direct investment).
- Bond: Bonds or other debt securities with an original maturity of more than one year; includes notes and debentures.
- Money market: Securities with an original maturity of one year or less, including short-term instruments like certificates of deposits and bills of exchange.
- Collective Investment: Share certificates and registry entries or other evidence of investor in an institution for collective investment such as mutual funds and investment trusts.
- Derivatives and other instruments: Rights, warrants, financial options and futures; secondary market operations in other financial claims (including sovereign loans, receivables, and discounted bills of trade); forward operations; swaps of bonds and other debt securities; operations in foreign exchange without any other underlying transaction (spot or forward trading on the foreign exchange markets, forward cover operations).
- Commercial Credit: Operations directly linked with international trade transactions or with the rendering of international services.
- Financial Credit: Credits other than commercial credits granted by all residents, including banks to nonresidents or vice versa.
- Direct Investment: Investments for establishing lasting economic relations abroad by residents and domestically by non-residents (for example, producing goods and services and allowing investor participation in enterprise management).
- Direct Investment Liquidation: Transfer of principal, including initial capital and capital gains of a foreign direct investment as defined above.
- Guarantees: Guarantees, sureties, and financial backup facilities provided by residents to nonresidents and vice versa; includes securities pledged for payment or performance of a contract (warrants, performance bonds, standby letters of credit) and financial backup facilities used as a guarantee for independent financial operations.
- Real Estate: Acquisition of real estate not associated with direct investment, including investment of a purely financial nature in real estate or acquisition for personal use.
- Personal capital transaction: Transfers initiated on behalf of private persons to benefit other private persons; includes loans or settlements of debt in country of origin by immigrants, gifts and endowments, loans, inheritances and legacies, and emigrants' assets.

*Content based on the supplied IMF working paper excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16252.pdf_