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International Capital Flows and Development - Financial Openness Matters

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Abstract

Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional on various countries’ characteristics. The secondary datasets consist of respectively a series of repeated cross-sectional living conditions monitoring surveys (LCMSs). The LCMSs were collected in 1998 (baseline) and 2004 (follow-up), that is both prior, during and after the project implementation. Our aim is to assess the ability of the parametric and semi-parametric models as well as using a time- series of cross-sections to provide an adequate description of the logarithm of per adult equivalent consumption of rural household conditional on few covariates, including an infrastructure treatment dummy variable. Although, the mean cotton sales share of household income has more than doubled despite the fact that the mean distance to the input market remained unchanged from 1998 to 2004, the parametric and semi-parametric estimation results are only small and statistically insignificant in terms of gains to mean consumption emerged in the longer-term. The main results are robust to corrections for various sources of selection bias.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 11-2012.

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Length: 44 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:gii:giihei:heidwp11-2012

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Keywords: Lucas paradox; capital flows; financial openness; economic development;

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Cited by:
  1. Konov, Joshua Ioji, 2012. "Market Economy under Rapid Globalization and Rising Productivity," MPRA Paper 48750, University Library of Munich, Germany.
  2. Anderson, John, 2013. "Converting and transferring currency : benchmarking foreign exchange restrictions to foreign direct investment across economies," Policy Research Working Paper Series 6601, The World Bank.
  3. Robert Vermeulen & Jakob de Haan, 2012. "Net Foreign Asset (Com)position: Does Financial Development Matter?," DNB Working Papers 340, Netherlands Central Bank, Research Department.
  4. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomas, 2014. "International asset allocations and capital flows : the benchmark effect," Policy Research Working Paper Series 6866, The World Bank.
  5. repec:idb:brikps:81941 is not listed on IDEAS
  6. Joseph E. Gagnon, 2013. "The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances," Working Paper Series WP13-2, Peterson Institute for International Economics.

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