Opening Capital Markets Boosts Local Economies
October 8, 2003
Opening capital markets encourages economic development in poorer nations because the inflow of capital from richer nations reduces investment costs and boosts productivity. Opponents of liberalizing capital markets argue that it does not generate greater efficiency, but invites speculation and other damaging scenarios. A recent article by Peter Blair Henry finds that liberalizing capital markets is a decidedly productive thing.
In the late 1980s and early 1990s a number of developing countries liberalized their stock markets, opening them to foreign investors for the first time. Henry uses these 18 countries as the basis of his research. He found that:
- Capital was significantly cheaper to obtain in countries that liberalized -- with the aggregate dividend yield falling by an average of 240 basis points.
- The growth of capital stock rose from an average of 5.4 percent per year in the pre-liberalization period to 6.5 percent in the post-liberalization period.
- Productivity -- the yearly growth in output per worker -- rose from an average of 1.4 percent to 3.7 percent.
Since the cost of capital falls, investment booms, and the growth rate of output per worker increases when countries liberalize the stock market, the increasingly popular view that capital account liberalization brings no real benefits seems untenable.
Source: Les Picker, "Capital Account Liberalization, The Cost of Capital, and Economic Growth," National Bureau of Economic Research, NBER Digest, August 2003; based upon Peter Blair Henry, "Capital Account Liberalization, The Cost of Capital and Economic Growth," National Bureau of Economic Research, Working Paper, No. 9488, May 2003; also published as "Capital Account Liberalization, The Cost of Capital, and Economic Growth," American Economic Review, May 2003, pp. 91-96.
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