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Financial Liberalization, Limited Contract Enforcement and Productivity

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Veröffentlicht/Copyright: 20. September 2013
Journal of Globalization and Development
Aus der Zeitschrift Journal of Globalization and Development Band 4 Heft 1

Abstract

This paper investigates whether opening up to international financial flows improves aggregate productivity in the presence of limited contract enforceability. I present a model of two countries that differ in terms of the degree of contract enforcement and analyze the consequences of financial market integration among them. I then test the predictions of the model empirically. The model predicts that aggregate productivity improves after financial integration, in economies with strong contract enforcement, while it deteriorates in countries with weak enforcement. The empirical analysis confirms the effect of capital account liberalization depends on the strength of contract enforcement.

Corresponding author: Meryem Saygili, Economics Division, Department of Social Sciences, The University of Texas at Tyler, Tyler, TX, USA, e-mail:
  1. 1

    See Kose et al. (2006) for a detailed review of the literature.

  2. 2

    Song et al. (2011) also have a similar idea of micro-level resource misallocation. See Restuccia and Rogerson (2008), and Hsieh and Klenow (2009) for more reference on misallocations.

  3. 3

    Alfaro et al. (2004) focus on the importance of local financial markets for the growth benefits of FDI.

  4. 4

    The model draws on Antunes et al. (2008b).

  5. 5

    This set up generates a trivial policy function: at the end of a period agents consume γ portion of their wealth and leave the rest to the next generation as bequest.

  6. 6

    I suppress the time subscript for notational convenience.

  7. 7

    The proof is available upon request.

  8. 8

    See Antunes et al. (2008a) for the proof of existence and uniqueness of the steady-state equilibrium.

  9. 9

    I set the relative size of populations to match the US’s income share in the RTW, which is around 54% in 2004 (World Development Indicators, WDI).

  10. 10

    I could alternatively group countries as developing vs. developed instead of US vs. RTW. As long as the degrees of contract enforcement are different for two countries (or groups of countries) the implications of the model hold true.

  11. 11

    I also find 0.47 for entrepreneurs’ income GINI in the US.

  12. 12

    Although in the model the productivity is defined as the weighted average of the productivity of all producers, empirical analysis relies on a TFP measure derived from an aggregate production function. This is due to unavailability of a micro data set that would cover a large set of countries.

  13. 13
  14. 14

    I repeat the exercise with δ=0.06 but the results are not sensitive to the choice of the depreciation rate.

  15. 15

    Number of workers is arrived at by multiplying real GDP per capita with total population, and then dividing it by real GDP per worker.

  16. 16

    See Kose et al. (2006) for an extended discussion.

  17. 17

    An alternative measure of de facto financial openness is the sum of total assets and liabilities minus foreign exchange reserves and derivatives. The results I get using this measure, are comparable to the ones reported in the paper. However, the sample size drops nearly by half, which in turn makes GMM results inaccurate as the number of instruments becomes large relative to the number of observations. Therefore, I stick to the original measure of financial openness, which is the sum of total assets and liabilities in foreign direct investment and portfolio equity investment. The correlation between the two measures is 0.56.

  18. 18

    Earle and Sakova (2000), using household survey data from six transition countries, show that own-account workers are unproductive and involuntarily self-employed.

  19. 19

    This empirical specification can be equivalently expressed as TFP growth. Economists mostly interested in the effect of policies on TFP growth rather than TFP levels. The results, however, are not sensitive to alternative specifications. The regressions of TFP levels (without having lagged TFP as an independent variable) are presented in the next section. Even though, R-squared values drop significantly, the results are comparable.

  20. 20

    Hausman tests reject the validity of random-effects in all specifications. The test results are available upon request.

  21. 21

    See Roodman (2009a) for a more detailed review of the method and its implementation.

  22. 22

    Two measures of FL and two measures of CE can be in four different combinations without an interaction term. I only report the results from the combinations of the measures of CE with the de facto measure of FL. I do not report the results with the de jure measure, for space considerations. In both cases the coefficient on the de jure measure is insignificant, while the coefficient on CE measure is positive and significant. The results are available upon request.

  23. 23

    The test results are not reported but available upon request.

  24. 24

    The coefficients of contract enforcement cannot be estimated as they disappear under the within-group transformation.

  25. 25

    I use 4-year averages instead of 5-year or more, otherwise the sample size gets too small.

  26. 26

    Including lagged self-employment reduces the number of observations considerably, which in turn makes GMM estimation inappropriate.

  27. 27

    The measures of contract enforcement are time-invariant, hence, absorbed in fixed effects.

  28. 28

    The results on Tables 15–18 are all from fixed effect regressions. Random effects are rejected in all cases, and the test results are available upon request.

  29. 29

    GMM results are also available upon request.

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Published Online: 2013-09-20
Published in Print: 2013-08-01

©2013 by Walter de Gruyter Berlin Boston

Artikel in diesem Heft

  1. Masthead
  2. Masthead
  4. Does Foreign Aid Displace Domestic Taxation?
  5. The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?1)
  6. Financial Liberalization, Limited Contract Enforcement and Productivity
  7. Property Insecurity and Conflict
  8. Erratum
  9. Does Foreign Aid Displace Domestic Taxation?
https://doi.org/10.1515/jgd-2012-0008

Artikel in diesem Heft

  1. Masthead
  2. Masthead
  4. Does Foreign Aid Displace Domestic Taxation?
  5. The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?1)
  6. Financial Liberalization, Limited Contract Enforcement and Productivity
  7. Property Insecurity and Conflict
  8. Erratum
  9. Does Foreign Aid Displace Domestic Taxation?
Heruntergeladen am 27.4.2026 von https://www.degruyterbrill.com/document/doi/10.1515/jgd-2012-0008/html?lang=de
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