Global Trade Liberalization and the Developing Countries - Issues Brief

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World Economic and Financial Surveys Series

Research at the IMF



Effects of Financial Globalization on Developing Countries: Some Empirical Evidence

Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei and M. Ayhan Kose

March 17, 2003

Use the free Adobe Acrobat Reader to view the full text of 590kb pdf file.
Also see September 2003 version, published in the Occasional Paper series.

Contents

Summary
 

I.

Overview
A. Definitions and Basic Stylized Facts
B. Does Financial Globalization Promote Growth in Developing Countries?
C. What Is the Impact of Financial Globalization on Macroeconomic Volatility?
D. The Role of Institutions and Governance on the Effects of Globalization
E. Summary
 

II.

Basic Stylized Facts
A. Measuring Financial Integration
B. North-South Capital Flows
C. Factors Underlying the Rise in North-South Capital Flows
 

III.

Financial Integration and Economic Growth
  A.
 Potential Benefits of Financial Globalization in Theory
  B.
 Empirical Evidence
  C.
 Synthesis
 

IV.

Financial Globalization and Macroeconomic Volatility
  A.
 Macroeconomic Volatility
B. Crises as Special Cases of Volatility
C. Has Financial Globalization Intensified the Transmission of Volatility?
D. Some Factors That Increase Vulnerability to the Risks of Globalization
 

V.

Absorptive Capacity and Governance in the Benefits/Risks of Globalization
A. Threshold Effects and Absorptive Capacity
B. Governance As an Important Element of Absorptive Capacity
C. Domestic Governance and the Volatility of International Capital Flows
D. Summary
 
Text Tables
1. Volatility of Different types of Capital Inflows
2. Fastest and Slowest Growing Economies During 1980-2000 and Their Status of Financial Openness
3. Summary of Recent Research on Financial Integration and Economic Growth
4. Volatility of Annual Growth Rates of Selected Variables
5. Summary of Studies on Welfare Gains from International Risk Sharing
6. Are Small States Different? Some Summary Statistics
 
Figures
1. Measures of Financial Integration
2. Gross Capital Flows
3. Net Capital Flows
4. Foreign Ownership Restrictions
5. Channels Through Which Financial Integration Can Raise Economic Growth
6. Increase in Financial Openness and Growth of Real Per Capital GDP
7. Increase in Financial Openness and Growth of Real Per Capita GDP: Conditional Relationship, 1982-97
8. Differential Effects of Financial and Trade Integration on Improvements in Health
9. Volatility of Income and Consumption Growth
10. Corruption and Foreign Direct Investment
11. Difference Between Actual Internationa Mutual Fund Investment and the MSCI Benchmark: Transparent versus Opaque Countries
12. Herding and Opacity
13. Corruption Tilts the Compoition of Capital Flows Towards Borrowing
14. Welfare Gains from International Risk Sharing
 
Boxes
1. The Effects of Different Types of Capital Flows on Growth
2. Do Financial and Trade Integration Have Different Effects on Economic Development? Evidence from Life Expectancy and Infant Mortality
3. The Effects of Globalization on Volatility: A Review of the Empirical Evidence
4. Herding and Momentum Trading by International Investors
5. Transparency and International Mutual Funds
 

Appendices
I. The First Era of International Financial Integration, 1870–1913
II. Calculating the Potential Welfare Gains from International Risk Sharing
III. Contingent Securities for International Risk Sharing
IV. Small States and Financial Globalization

V.

Data Appendix
 
References