April 2008

No. 3475: A Pragmatic Approach to Capital Account Liberalization

published in: Journal of Economic Perspectives, 2008, 22 (3), 149-172

Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.