Does stock market liberalization spur financial and economic development in the MENA region?

In order to investigate the impact of stock market liberalization on economic growth in the MENA region, we need to place our contribution in the economic growth literature. Our study is related to the literature on policy impacting growth rather than the debate on "convergence" between low-income and high-income countries which dominates the current research on economic growth. Our study is one of the few studies that focus on MENA countries. Several issues are addressed about the impact of stock market liberalization on economic growth. Using annual data from 11 MENA countries over the 1979-2005 period, the empirical results indicate that stock market liberalization has no effect on economic and investment growth, whereas the impact on stock market development is negative in the short run but turns positive in the long run. However, when we include certain pre-conditions for liberalizing the stock market, we find that a more developed stock market prior to liberalization; less government intervention and by not fully opening the economy to foreign trade, reinforces the positive impact of liberalization on stock market development. These results could have some important policy implications in which domestic financial reforms should precede policies that aim at liberalizing the stock market. This is not only easier and faster to accomplish, but from a policy sequencing perspective it pays to reform the trade regime before totally liberalizing the (portfolio component of the) capital account. In conclusion, reforms should first and foremost start in the domestic economy before opening it fully to foreign participation. Our results are robust to several specifications but they should be tentative since there may be some measurement error in the calculation of several variables which could downward bias the estimates. Journal of Comparative Economics 36 (4) (2008) 673-693.