Financial openness, capital accumulation, and productivity in emerging and developing economies

This paper investigates whether financial openness stimulates capital accumulation and productivity growth in emerging and developing economies. The empirical literature, although relatively scarce, suggests a positive effect of financial openness on capital accumulation and productivity growth. We estimate growth equations for capital stock and productivity using data for 104 emerging and developing economies over the period 1980-2019. Our results diverge from those reported in the empirical literature: there is no evidence that financial openness stimulates capital stock growth and productivity growth, even allowing these relationships to vary with the institutional, financial and macroeconomic characteristics. These results represent, to some extent, a challenge to the conventional wisdom on the policy of liberalization and management of capital flows, which presumes that countries can benefit from financial openness in the form of economic growth in the presence of appropriate initial conditions.