Private Capital Flows, Financial Development, and Economic Growth in Developing Countries
AbstractAn important issue in the debate over the desirability of freer capital mobility for developing countries is whether capital flows have significant effects on economic growth. Proponents of capital account liberalization cite the growth-promoting attributes of capital inflows as a key benefit of financial integration for developing countries. Unfortunately, there is little empirical evidence to confirm or refute this claim, except for several studies that establish a positive link between inflows of foreign direct investment (FDI) and economic growth. This paper helps to fill the gap in the literature by investigating the role of private capital flows in the determination of economic growth using panel data for 40 developing countries from 1975–95. Unlike existing empirical work, this paper focuses on the effects of a broad measure of capital flows on economic growth, rather than on a more specific category, such as FDI, and it emphasizes the role played by the domestic financial sector in the process linking capital flows and growth. A dynamic panel-data methodology is used that controls for country-specific effects and accounts for the potential endogeneity of the explanatory variables. This study finds evidence that capital inflows foster higher economic growth, above and beyond any effects on the investment rate, but only for economies where the banking sector has reached a certain level of development. The results thus suggest that the domestic financial sector plays a pivotal role in ensuring that international capital flows do indeed promote economic growth in developing countries.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 00-15.
Length: 31 pages
Date of creation: 2000
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Economic growth; Capital flows; Financial development;
Other versions of this item:
- Jeannine N. Bailliu, 2000. "Private Capital Flows, Financial Development, and Economic Growth in Developing Countries," Working Papers 00-16, Bank of Canada.
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O50 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-09-05 (All new papers)
- NEP-DEV-2000-09-05 (Development)
- NEP-FMK-2000-09-05 (Financial Markets)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.