How does financial openness affect economic growth at different stages of economies?

Abstract

An area of debate in development economics is how financial openness affects economic development. In spite of considerable research, there is no consensus. This is because there are many financial openness indices, so the results are not robust to variations in the index, as discussed in Gräbner et al. (2021). Due to the possibility of different initial conditions, different levels of development, and/or different stages of transitions, the effect of financial openness could vanish without considering these factors. Therefore, this paper categorizes countries into stable countries (High-, Medium-, and Low-income countries) and transition countries (Transitioning to High and Transitioning to Medium income) based on World Bank Categorization. The results show that the effect of financial openness is positive for medium- and low-income level countries. However, it is not at a high-income level.

Keywords:

• Financial openness
• level of development
• economic growth

JEL Classification Numbers:

• F43
• G15
• O47

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Available at https://www.elibrary-areaer.imf.org/Pages/Home.aspx

2 Available at https://www.heritage.org/index/download/#

3 The Atlas method is a method that smooths exchange rate fluctuation by a three-year moving average using a price-adjusted conversion factor. For measuring inflation, the current methodology is using the change in SDR deflator complied from inflation measures represented in the IMF’s Special Drawing Rights. The thresholds are updated annually at the beginning of the World Bank’s fiscal year, July 1${}^{\mathit{\text{st}}};$ Available at https://datacatalog.worldbank.org/dataset/world-development-indicators.

4 Source: World Bank National Account Data, and OECD National Accounts Data files. Available at https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

5 Source: IMF Working Paper 2017/115. Available at https://www.imf.org/-/media/Files/Publications/WP/2017/datasets/wp115.ashx

6 Source: IMF Staff Paper, Electronic Supplementary Material. Available at https://link.springer.com/article/10.1057/imfsp.2008.28

7 World Bank Open Data. Available at https://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS

8 Source: Penn World Table. Available at https://www.rug.nl/ggdc/productivity/pwt/?lang=en

9 In Solow (1957), Solow Residual was not coined. However, it is widely used in literature. Source: Penn World Table. Available at https://www.rug.nl/ggdc/productivity/pwt/?lang=en

10 Source: World Bank Open Data. Available at https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS

11 The test results shows that the null hypothesis is rejected at roughly 10% significant. This implies the possibility of misspecification. Therefore, the test for AR(3) is implemented, and the null hypothesis is not rejected. This implies that the estimation could satisfy the required condition.

12 This is known as Brazilian Imposto Sobre Operacoes Financeiras (IOF).