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Benefits and costs of international financial integration : theory and facts

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  • Agenor, Pierre-Richard

Abstract

The author provides a selective review of the recent analytical and empirical literature on the benefits and costs of international financial integration. He discusses the impact of financial openness on consumption, investment, and growth, and the impact of foreign bank entry on the domestic financial system. Consistent with some recent studies, the author argues that financial integration must be carefully prepared and managed to ensure that the benefits outweigh the short-run risks. Prudent macroeconomic management, adequate supervision and prudential regulation of the financial system, greater transparency, and improved capacity to manage risk in the private sector are important requirements for coping with potentially abrupt reversals in pro-cyclical, short-term capital flows. The author adopts a more skeptical view than some assessments in two areas, however. First, only foreign direct investment appears to provide dynamic gains and improved prospects for growth; the evidence on the benefits of other types of capital flows remains weak. Second, empirical research on the net benefits associated with foreign bank penetration is far from conclusive; in particular, the possibility that such penetration may lead to adverse changes in the allocation of credit among domestic firms cannot be dismissed on the basis of the existing evidence.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2699.

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Date of creation: 31 Oct 2001
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Handle: RePEc:wbk:wbrwps:2699

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Related research

Keywords: Banks&Banking Reform; Capital Markets and Capital Flows; Fiscal&Monetary Policy; Economic Theory&Research; International Terrorism&Counterterrorism; Economic Theory&Research; Banks&Banking Reform; Macroeconomic Management; Environmental Economics&Policies; Financial Intermediation;

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  1. Kaminsky, Graciela & Schmukler, Sergio, 2001. "Short and long-run integration : do capital controls matter ?," Policy Research Working Paper Series 2660, The World Bank.
  2. Gerard Caprio & Patrick Honohan, 1999. "Restoring Banking Stability: Beyond Supervised Capital Requirements," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 43-64, Fall.
  3. Maurice Obstfeld, 1995. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
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  6. Chuhan, Punam & Perez-Quiros, Gabriel & Popper, Helen, 1996. "International capital flows : do short-term investment and direct investment differ?," Policy Research Working Paper Series 1669, The World Bank.
  7. Fernandez-Arias, Eduardo & Montiel, Peter J, 1996. "The Surge in Capital Inflows to Developing Countries: An Analytical Overview," World Bank Economic Review, World Bank Group, vol. 10(1), pages 51-77, January.
  8. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
  9. Leonardo Bartolini & Allan Drazen, 1996. "Capital account liberalization as a signal," Staff Reports 11, Federal Reserve Bank of New York.
  10. Yusuf, Shahid, 2001. "Globalization and the challenge for developing countries," Policy Research Working Paper Series 2618, The World Bank.
  11. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
  12. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
  13. Claessens, Stijn & Dooley, Michael P & Warner, Andrew, 1995. "Portfolio Capital Flows: Hot or Cold?," World Bank Economic Review, World Bank Group, vol. 9(1), pages 153-74, January.
  14. Pierre-Richard Agenor & Joshua Aizenman, 1998. "Volatility and the Welfare Costs of Financial Market Integration," NBER Working Papers 6782, National Bureau of Economic Research, Inc.
  15. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "Excessive FDI flows under asymmetric information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  16. B. Gerard Dages & Linda Goldberg & Daniel Kinney, 2000. "Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 17-36.
  17. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, vol. 51(1), pages 169-194, June.
  18. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, vol. 15(2), pages 177-97, August.
  19. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  20. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," World Bank Economic Review, World Bank Group, vol. 13(2), pages 379-408, May.
  21. Lewis, Karen K, 1996. "What Can Explain the Apparent Lack of International Consumption Risk Sharing?," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 267-97, April.
  22. Berthelemy, Jean-Claude & Demurger, Sylvie, 2000. "Foreign Direct Investment and Economic Growth: Theory and Application to China," Review of Development Economics, Wiley Blackwell, vol. 4(2), pages 140-55, June.
  23. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls: Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
  24. Simón Cueva & Stephen Tokarick & Erik J. Lundbäck & Janet Gale Stotsky & Samuel P. Itam, 2000. "Developments and Challenges in the Caribbean Region," IMF Occasional Papers 201, International Monetary Fund.
  25. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
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