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The Influence of Capital Controls on Long Run Growth: Where and How Much?

  • Areendam Chanda

    (North Carolina State University)

The recent financial crisis in East Asia generated a revival of interest in the merits of financial openness. The ensuing debate on the benefits of openness has focused more on short and medium run issues than on the long run effects. Within the empirical literature on economic growth, little or no attention has been paid to the effects of financial openness. Contrary to the orthodox position, the few results that exist suggest that capital controls have no effect on economic growth. This paper argues that this conclusion emerges from a failure to account for underlying differences across countries with similar degrees of capital controls. I show that the degree of ethnic and linguistic heterogeneity in a country plays a significant role in explaining the effects of controls on economic growth. For countries with relatively higher degrees of ethnic heterogeneity, the effects are particularly adverse whereas for countries with high degrees of homogeneity, capital controls actually have a net positive effect on economic growth. On balance, more developing countries suffered due to controls than not. Within the sample of 57 non OECD countries that did implement controls for the period 1975-95, as many as 39 saw a reduction in their growth rates. This result is robust to a number of variables commonly used in the economic growth regressions.

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Paper provided by EconWPA in its series International Finance with number 0201001.

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Length: 41 pages
Date of creation: 09 Jan 2002
Date of revision:
Handle: RePEc:wpa:wuwpif:0201001
Note: Type of Document - Acrobat Pdf; prepared on IBM PC ; to print on HP; pages: 41; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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