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

NBER WORKING PAPER SERIES CAPITAL ACCOUNT LIBERALIZATION, THE COST OF CAPITAL, AND ECONOMIC GROWTH Peter Blair Henry Working Paper 9488 /papers/w9488 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2003 This paper was prepared for the session, “Debt, Equity, and Financial Openness” at the American Economic Association meetings in Washington, D.C. on January 4, 2003. A slightly condensed version will appear in the American Economic Review, Papers and Proceedings , May 2003. I am grateful for financial support from an NSF CAREER Award and the Stanford Institute of Economic Policy Research (SIEPR). I thank Sandy Darity, John McMillan and Linda Tesar for comments. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Peter Blair Henry. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including notice, is given to the source. Capital Account Liberalization, The Cost of Capital, and Economic Growth Peter Blair Henry NBER Working Paper No. 9488 February 2003 JEL No. E0, F0, G0 ABSTRACT 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