NCPA - National Center for Policy Analysis

Financial Liberalization's Effect on Growth Rates

March 15, 2002

Does financial liberalization spur growth? According to a new study by the National Bureau of Economic Research, the answer is "yes."

Using a large sample of countries since 1980, researchers found that financial liberalization led to a one percent increase on average in a country's annual growth rate over a five-year period.

There are a number of ways in which equity market liberalization -- primarily, opening financial markets to foreign investors and lenders -- can contribute to increased growth, say economists. For instance, improved risk-sharing -- by spreading risks over a larger pool of capital and larger number of actors -- may lower the cost of capital, leading to greater investment and higher risk/higher return projects.

Interestingly, they found that a large secondary school enrollment, a small government and an Anglo-Saxon legal system enhance the effect of liberalization.

Source: Andrew Balls, "Financial Liberalization Spurs Growth," NBER Digest, October 2001; based on Geert Bekaert, Campbell Harvey and Christian Lundblad, "Does Financial Liberalization Spur Growth?" NBER Working Paper No. 8245, April 2001, National Bureau of Economic Research.

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