Capital Account Liberalization, The Cost of Capital, and Economic Growth

Peter Blair Henry

NBER Working Paper No. 9488
Issued in February 2003
NBER Program(s):   CF   IFM

Three things happen when emerging economies open their stock markets to foreign investors. First, the aggregate dividend yield falls by 240 basis points. Second, the growth rate of the capital stock increases by an average of 1.1 percentage points per year. Third, the growth rate of output per worker rises by 2.3 percentage points per year. 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.

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Published: "Capital Account Liberalization, The Cost of Capital, and Economic Growth", American Economic Review, May 2003, Vol. 93, No. 2, pp. 91-96.

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