External financial liberalization and growth in emerging countries: a panel data estimation using a new index (1990-2004)

The 2008 financial crisis and its economic downturn have reignited the fierce debate about the financial liberalization and its implications on economic growth, especially in the realm of the developing countries. In this paper, we focus on this line of research, contributing in two main ways. First, we present an alternative method to measure financial liberalization, based on the same International Monetary Fund (IMF) annual reports most studies currently use as source of data. Second, we use panel data for a group of relevant emerging countries in Latin America and East Asia, including the new proxy in an attempt to test its effects on economic growth during the recent period (1990-2004). The more reliable index has not changed the main consensus on the subject, though, as results are in accordance with the prevalent thesis on the literature, that is, the link between financial liberalization and economic growth might not be as strong as may be supposed in theory. This means the other basic theoretical determinants must instead be observed to spur growth, while countries should observe the Keynesian agenda of stabilizing international finance through the introduction of limits to the free mobility of capital flows, as IMF economists have recently supported.