Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the ...textbook theory of liberalization holds up quite well to a critical reading of this literature. Most papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.
In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 4.1 percentage points. ...Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel-data estimations show that a 10-percentage point increase in a firm's expected future sales growth predicts a 2.9- to 3.5-percentage point increase in the growth rate of its capital stock. Country-specific changes in the cost of capital drive changes in investment but firm-specific changes in the cost of capital do not.
A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index ...experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents.
Stock market liberalizations lead private investment booms. In a sample of 11 developing countries that liberalized their stock markets, 9 experience growth rates of private investment above their ...non-liberalization median in the first year after liberalizing. In the second and third years after liberalization, this number is 10 of 11 and 8 of 11, respectively. The mean growth rate of private investment in the three years immediately following stock market liberalization exceeds the sample mean by 22 percentage points. The evidence stands in sharp contrast to recent work that suggests capital account liberalization has no effect on investment.
When developing countries liberalize the stock market, their cost of capital falls, investment booms, and the growth rate of output per worker increases. While the facts cast doubt on the view that ...capital-account liberalization brings no real benefits, there are many important questions to which the evidence does not speak. For some of these equations, such as whether liberalizations cause crises, aggregate data may yet prove useful. For other questions, aggregate data are simply too coarse to provide precise answers. Moving the technological frontier to firm-level data should enhance general understanding of the process by which the effects of liberalization are transmitted to the real economy.
When countries liberalize their stock markets, firms that become eligible for foreign purchase (investible), experience an average stock price revaluation of 15.1%. Since the historical covariance of ...the average investible firm's stock return with the local market is roughly 200 times larger than its historical covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or roughly two fifths of the total revaluation; and (2) the firm-specific revaluations are directly proportional to the firm-specific changes in systematic risk.
The Baker Hypothesis Chari, Anusha; Henry, Peter Blair; Reyes, Hector
The Journal of economic perspectives,
07/2021, Letnik:
35, Številka:
3
Journal Article
Recenzirano
Odprti dostop
In 1985, James A. Baker III's "Program for Sustained Growth" proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign ...investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since the early 1990s.
A large literature that evaluates capital account liberalization at the infinite horizon finds trivial welfare gains of the policy change. In contrast, evaluating capital account liberalization at ...finite horizons yields a large and significant impact on consumer welfare. Hicksian-equivalent-variation calculations indicate that the representative consumer would require a 44 percent increase in consumption to remain indifferent between opening up or continuing to live in autarky. As the evaluation horizon increases, the additional welfare gains from opening up moderate and gradually converge to zero as time approaches infinity. These results suggest that the welfare gains of capital account liberalization evaluated at a series of finite horizons are more appropriate and policy-relevant than an evaluation conducted at infinity.
•The welfare impact of capital account liberalization policies is sizeable.•Liberalization induces temporary growth but permanent impacts on per capita incomes levels.•Infinite horizon estimates understate the welfare gains of moving from financial autarky to openness.•Finite horizon Hicksian-equivalent variation gains yield significant impacts on consumer welfare.•Capital account liberalization evaluated at finite horizons may be more policy-relevant and appropriate.
Is Debt Relief Efficient? ARSLANALP, SERKAN; HENRY, PETER BLAIR
The Journal of finance (New York),
April 2005, Letnik:
60, Številka:
2
Journal Article
Recenzirano
Odprti dostop
When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms-a $42 billion increase in shareholder value. ...There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment, and growth. Since the market capitalization of U.S. commercial banks with developing country loan exposure also rises-by $13 billion-the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.
From 1980 to 1992, emerging and developing countries grew by 3.4 percent per year. Their annual rate of growth increased to 5.4 percent between 1993 and 2012. No such increase occurred for advanced ...nations, whose average growth from 1980 to 2012 was roughly constant (excluding the impact of the 2008-2009 Recession). Developing nations turned themselves around by embracing discipline-sustained commitment to a pragmatic and flexible growth strategy. Three illustrations of discipline through the lens of trade, fiscal, and debt reforms in the developing world offer relevant, practical lessons for recovery in advanced economies and continued catch-up growth in developing nations.
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