Why Did Financial Globalization Disappoint?


Rodrik, Dani, and Arvind Subramanian. 2008. “Why Did Financial Globalization Disappoint?”. Copy at http://www.tinyurl.com/y5m3vjaf

Date Published:

Mar 1, 2008


As Fischer had prophesied, there has been an explosion in empirical studies on the consequences of financial globalization. But far from clinching the case for capitalaccount liberalization, these studies paint quite a mixed and paradoxical picture.3 Kose, Prasad, Rogoff, and Wei (2006, hereafter KPRW), who provide perhaps the most detailed and careful review of the literature, conclude that the cross-country evidence on the growth benefits of capital-account openness is inconclusive and lacks robustness. They argue that one should look for the gains not in enhanced access to finance for domestic investment, but in indirect benefits that are hard to detect with macroeconomic data and techniques (an argument which we will evaluate below). In another paper, Kose, Prasad and Terrones (2003) find that consumption volatility actually rose (relative to output volatility) in emerging market economies during the current era of financial globalization—a finding that flatly contradicts theoretical expectations. Perhaps most paradoxical of all are the findings of Prasad, Rajan, and Subramanian (2007, hereafter PRS) and Gourinchas and Jeanne (2007), which throw cold water on the presumed complementarity between foreign capital and economic growth: it appears that countries that grow more rapidly are those that rely less and not more on foreign capital; and in turn foreign capital tends to go to countries that experience not high, but low productivity growth.


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