International Financial Liberalization, Corruption, and Economic Growth

Transcription

1 Review of Iteratioal Ecoomics 9(4) Iteratioal Fiacial Liberalizatio Corruptio ad Ecoomic Growth Fracisco L. Rivera-Batiz* Abstract This paper examies the effects of capital accout liberalizatio o the log-ru growth of a developig ecoomy. A geeral-equilibrium edogeous growth model is costructed i which corruptio forms a itegral part of the goverace system of the coutry. By udermiig the profitability of iovatios corruptio lowers the rate of retur to capital ad reduces the rate of techological chage. The impact of iteratioal fiacial liberalizatio o log-ru growth i this model ca be either positive or egative. A drop i growth is obtaied whe the level of corruptio is high eough to cause domestic rates of retur to capital before liberalizatio to drop below those i the rest of the world. I this case liberalizatio geerates capital outflows which act as a costraiig force o iovatio reducig the rate of techological chage ad lowerig output growth. O the other had if the level of corruptio is sufficietly low the capital accout liberalizatio will serve as a boost to the coutry s techical chage ad growth. 1. Itroductio The globalizatio of capital markets i recet years has led to a historical degree of fiacial itegratio i the world. As Obstfeld (1998 p. 11) remarks: the worldwide tred of fiacial opeig i the 1990s has restored a degree of iteratioal capital mobility ot see sice this cetury s begiig. Associated with this globalizatio has bee a worldwide process of capital accout liberalizatio. I idustrialized coutries the elimiatio of restrictios o capital flows accelerated i the 1980s ad 1990s begiig with Margaret Thatcher s reforms i the Uited Kigdom cotiuig with Japa s liberalizatio of capital iflows ad outflows i the early 1980s ad edig with the Europea Commuity elimiatio of itra-commuity barriers to capital flows i the 1990s. Amog developig coutries liberalizatio efforts accelerated i the 1990s with coutries from Mexico to Korea elimiatig major barriers to iteratioal trade i assets. 1 The icreased global fiacial itegratio has resulted i substatial capital iflows i emergig markets. But despite this overall expasio may developig atios have ot shared i the icreased capital iflux. For example i 1998 the Lati America ad Caribbea regio together with the Europe ad Cetral Asia regio received $87 billio i et private capital iflows excludig foreig direct ivestmet (FDI). But i sub-sahara Africa this balace was egative that year with the regio sufferig a et private capital outflow of $1 billio. I fact aside from FDI private capital flows to sub-sahara Africa were either egative or egligible durig the 1980s ad As a result massive amouts of the wealth owed by Africa residets lies ivested elsewhere i the world. Collier et al. (1999) estimate that as much as 39% of the private wealth of the sub-sahara Africa regio i 1990 was held abroad. I recet years Africa coutries from Cameroo ad Nigeria to South Africa have experieced sustaied capital outflows (see Ajayi ad Kha 2000). *Rivera-Batiz: Room 1033 Iteratioal Affairs Buildig Columbia Uiversity New York NY USA. Tel: +1 (212) ; Fax: +1 (212) ; FLR9@Columbia.edu. The author is idebted to two referees for their valuable commets. 108 Cowley Road Oxford OX4 1JF UK ad 350 Mai Street Malde MA USA

2 728 Fracisco L. Rivera-Batiz The experiece of capital flight is ot restricted to coutries i sub-sahara Africa. The situatio applies also to a umber of coutries i Lati America ad the Caribbea as well as i trasitio ecoomies. 2 For example whe both officially recorded ad urecorded capital flows are take ito accout capital flight from some former Soviet Republics was extesive i the 1990s. Some studies estimate Russia private capital flight to have totaled $150 billio betwee 1992 ad 1999 (Cooper ad Hardt 2000; Abalki ad Whalley 1999). These capital outflows acted as substitutes for the massive capital iflows associated with iteratioal orgaizatios such as the IMF ad the World Bak. This paper provides a theoretical framework to examie how capital flight may be stimulated by the liberalizatio of a developig coutry s iteratioal fiacial trasactios. It the studies the effects of the capital outflows o the log-ru growth of the ecoomy. A geeral-equilibrium edogeous growth model is costructed i which corruptio forms a part of the coutry s ecoomic eviromet. Corruptio is assumed to act as a tax o the firms ad etrepreeurs iovatig desigig ad producig ew goods i the ecoomy. This reduces the ecoomy s rate of techological chage ad lowers the domestic rate of retur to capital. I this cotext the paper shows that the impact of iteratioal fiacial liberalizatio o log-ru growth ca be either positive or egative. A drop i growth is obtaied whe the level of corruptio is high eough to cause domestic rates of retur to capital before liberalizatio to drop below those i the rest of the world. Opeig the capital accout i this case geerates capital flight which causes the ecoomy s iovatio sector to cotract reducig the rate of techological chage ad causig output growth to declie. O the other had if the level of corruptio i the ecoomy is sufficietly low the capital accout liberalizatio will act to boost the coutry s techological chage ad growth. The ext sectio of the paper presets the edogeous growth model i the presece of corruptio. Iitially the ecoomy is assumed to be closed to iteratioal fiacial trasactios. Sectio 3 examies the growth effects of opeig the coutry to iteratioal trade i assets. The last sectio discusses the coclusios ad policy implicatios of the aalysis. 2. A Model of a Small Ope Ecoomy i the Presece of Corruptio A substatial literature has developed over the past few years examiig the sources ad cosequeces of corruptio. A wide array of variables have bee liked to corruptio icludig the (low) salaries received by civil servats the availability of ecoomic rets from which bribes ca be extracted ad the uder-developmet of the coutry s legal system amog may other variables. 3 I additio empirical work has emerged presetig cross-coutry data o the level of corruptio ad examiig the impact of corruptio o developmet. Most of these studies show a sigificat egative relatioship betwee corruptio ad various measures of ecoomic welfare icludig per capita icome icome equality ad GDP growth. 4 The model costructed i this paper seeks to capture the situatio of a developig coutry where corruptio forms a itegral part of the ecoomic system. Corruptio acts as a tax o the firms ad etrepreeurs iovatig desigig ad producig ew goods i the ecoomy. We assume that for each ew good to be produced ad sold a licese must be obtaied ad a govermet official must approve it. Although this may techically be costless paperwork activity officials are assumed to ask applicats for bribes i order to grat their approval. Govermet officials receive civil service

3 FINANCIAL LIBERALIZATION CORRUPTION AND GROWTH 729 icome that is egligible compared with the bribes; for simplicity this legitimate source of icome is assumed to be zero. The corrupt officials seek to maximize their expected icome by settig a kickback or bribery tax rate t expressed as a proportio of the reveues received by producers of ew goods i the coutry. They are free to set this rate subject to two costraits: the size of the tax base which depeds o the reveues made by producers of ew goods R ad a probability that the bribery scheme will be dismatled q. Both the reveue base ad the probability of the corruptio scheme breakig-dow are assumed to deped o the bribery tax rate. The reveues made by producers are assumed to declie with higher bribery tax rates. The probability of the corrupt regime beig dismatled rises with the rate t. As the bribery tax rates rise those beig taxed are more likely to fid it i their iterest to obtai the political capital to chage the goverace system i the coutry so as to eradicate corruptio. Uder the assumptios corrupt officials will seek to maximize their expected gai from bribes G which is equal to G = ( 1 -q) tr( t) (1) with all symbols as defied before (ote that the expected gai to the officials if the system is dismatled is zero). The first-order coditio for the maximizatio of G results i the followig expressio for the equilibrium bribe tax rate i the ecoomy: ( 1- q) ( 1- e) t* = q (2) where e =-(t/r)( R/ t) is the elasticity of producers reveues to the bribery tax rate (0 < e < i) ad q =dq/dt < 0 is the derivative of the probability of the corruptio regime bee dismatled with respect to the tax rate. Equatio (2) suggests that the bribery tax rate which maximizes the corrupt officials gai G will icrease whe: (1) the producers reveue fuctio is relatively more ielastic with respect to the bribery tax rate (2) the probability that the corrupt regime will be dismatled drops ad (3) a rise of the bribery tax rates has a smaller impact o the probability that the corrupt regime will me dismatled. The corruptio module just discussed is ow itroduced ito a geeral-equilibrium edogeous growth model. Cosider a ope ecoomy tradig i fial goods with the rest of the world. 5 Iitially the coutry is assumed to be closed to iteratioal fiacial trasactios. The ext sectio examies the case whe fiacial liberalizatio allows iteratioal trade i assets to occur. The ecoomy produces two fial goods X ad Y whose prices are determied exogeously (P x ad P y are exogeous). Sector X utilizes both physical ad huma capital ad is assumed to be a huma-capital itesive sector whose productio fuctio is of the Cobb Douglas type give by X = I x b H x 1-b (3) where X is the output of good X H x is the iput of huma capital b is a positive fractio ad I x is a sub-productio fuctio give by I x = Ê Zix Ë Á ˆ Â a i= 1 1 a (4)

4 730 Fracisco L. Rivera-Batiz where a is a positive fractio ad Z ix represets the use of physical capital good i i sector X where each Z ix is assumed to be slightly differetiated from other capital goods the total umber of which is at ay give momet i time. Note that each capital good eters symmetrically the sub-productio fuctio i equatio (4). O the assumptio that all Z ix are idetical the ( 1-a) a Ix = Zx (5) where Z x = Z ix represetig the total quatity demaded of capital goods by sector X. Substitutig equatio (5) ito (3) yields X = g Z b x H 1-b x (6) where g = b(1 - a)/a. This shows that productio of good X is a fuctio of the quatities of physical ad huma capital used i productio Z x ad H x ad the umber of capital goods available i the ecoomy. This type of productio relatioship where the parameter A = g represets a techology parameter that icreases with the umber of capital goods available for productio is derived from Romer (1990a) ad edogeizes techological chage by coectig it to the umber of capital goods. Sector Y produces a commodity that is itesive i uskilled labor ad its productio fuctio is give by Y = I b y L 1-b y (7) where Y is output L y is the iput of uskilled labor b is as defied earlier ad I y is a sub-productio fuctio give by I y = Ê Ziy Ë Á ˆ Â a i= 1 1 a with a as defied earlier ad with Z iy represetig the use of physical capital good i i sector Y. Followig the same assumptios made i relatio to equatio (5) we ca combie equatios (7) ad (8) ito Y = g Z b y L 1-b y (9) where Z y = Z iy is the total demad for capital i sector Y. Both fial goods sectors are assumed to fuctio i perfectly competitive markets. Firms miimizig costs of productio i these sectors will set price equal to uit costs as give by -g Px = Cx( WH PZ) (10) -g Py = Cy( WL PZ) (11) where C x ad C y are the uit cost fuctios i sectors X ad Y respectively W H is the wage rate of skilled labor or huma capital W L is the wage rate of uskilled labor ad P Z is the price of each capital good (all capital goods will have the same price as determied from the symmetry of the demad for ad supply of each capital good to be established ext). The productio fuctio for each capital good is give by Z i = HziL a 1-a zi (12) where H zi is the demad for huma capital i the firm producig capital good i L zi is the demad for uskilled labor used by each firm ad the expoet a is a positive fractio. (8)

5 FINANCIAL LIBERALIZATION CORRUPTION AND GROWTH 731 The profit of each capital goods producer is ( 1 *)- +. p I = PZ Z i -t WL L zi W H H zi Assumig that each firm maximizes profits the followig first-order coditios are obtaied: aa( 1 - t* ) P Z = W H Z i H zi ( 1- a) a ( 1- t* ) P Z = W L. From these two equatios oe ca derive that ap ( 1 - t* )= C ( W W ) Z Z L H where C Z is the uit cost of productio for each firm i the capital goods sector. Note that corruptio acts as a tax o capital goods producers reducig the effective price P Z that they receive per uit of the good sold. The greater the level of corruptio as represeted symbolically by a icrease i t the greater the tax. I a small ope ecoomy tradig i fial goods (but ot capital goods which remai otraded) the P x ad P y are both fixed by world markets. Give the umber of capital goods ad the prices of fial goods P x ad P y the equatios (2) (10) (11) ad (16) costitute a system of four equatios i four variables W L W H P Z ad t*. I a dyamic ecoomy will rise. I will discuss shortly the forces geeratig icreases i. But if we deote the steady-state growth rate of the umber of capital goods by g the equatios (10) (11) ad (16) imply that the wages of skilled ad uskilled labor as well as the prices of capital goods will all rise at the rate gg. I additio sice i a steady state the usage of iputs will ot be shiftig across sectors X ad Y the X ad Y will also grow at the steady-state rate g g. Cosequetly the ecoomy s aggregate output growth rate will also equal g g. The icrease i the umber of capital goods determies the log-ru growth rate. How are ew capital goods created? Followig the literature (Romer 1990a; Grossma ad Helpma 1991ab) we assume that ew capital goods are created by a research or techology sector that uses huma capital ad has the followig productio fuctio: d dt = = H a where H is the iput of huma capital i the techology sector ad a is a exogeous parameter that reflects the productivity of huma capital i geeratig ew capital goods with lower values of a represetig greater productivity. Give this productivity parameter equatio (17) suggests that the creatio of ew capital goods is positively related to the quatity of huma capital used by the techology/research sector ad to the existig umber of capital goods. The latter represets the fact that as rises the existig ideas available for iovators to geerate ew products icreases stimulatig iovatio ad as a result the umber of capital goods created (for more details see Romer 1990a). Note that from equatio (17): g = ( )= ( H a ). Z i L zi This meas that the rate of growth of ew capital goods which is directly related to the rate of growth of the ecoomy is determied by the amout of huma capital allocated to the research/techology sector. The ext step is to specify the equilibrium value of H. (13) (14) (15) (16) (17) (18)

6 732 Fracisco L. Rivera-Batiz The rate of retur o producig a ew capital good r is composed of the capital gai o the value of the capital good plus the divided rate: r = V V + p V where V is the value of a ew capital good V = dv/dt ad p deotes the profit obtaied from the productio of a capital good so that p/v is the divided rate. The value of a ew capital good is equal to the cost of producig the ew capital good which is give by V = ( W H )= ( W a ). From this oe derives that the capital gai the gai i the value of a ew capital good is give by Substitutig equatio (21) ito (19) yields r = W W - + p V. H H H VV = W W -. H H H But the profits i the productio of each capital good are p = PZ- C Z = 1-a( 1 -t*) PZ where we have made use of equatio (16). Utilizig equatios (14) (20) ad (23) we ca the modify equatio (22) ito r = W H WH - + [ 1-a( 1-t * )] HZ aa( 1- t * ) a = ( g -1) g+ 1-a( 1-t* ) H aa( 1 t* ) a (24) where H Z = H iz. Use has bee made of the fact that at the steady state skilled labor wages rise at the rate g g ad the umber of capital goods at the rate g. Equatio (24) determies the rate of retur o ew capital goods. But this relatioship icludes as a variable the total amout of huma capital used i the capital goods sector H Z. To solve the model we thus eed to itroduce the huma capital edowmet costrait (19) (20) (21) (22) (23) H + H x + H Z = H. (25) Usig equatios (14) (15) ad (18) ad some derivatios we ca trasform equatio (25) ito ga H + bh Z = H (26) where b = [(1 - b) + baa(1 + l)(1 - t*)]/baa(1 + l)(1 - t*) with l = Z y /Z x which is a fixed parameter uder a steady state. O combiig equatios (24) ad (26) ad with some maipulatio this yields a expressio for the steady-state rate of growth of the ecoomy: [ ] [ ] Z i Z i Z i [ ] [ - ] g = { 1-a( 1-t* ) da } H - baa( 1-t* ) d r Z [ ] where d = 1 - a(1 - t*) + b(1 - g)aa(1 - t*) which is assumed to be positive i order to esure a stable steady-state equilibrium. 6 Equatio (27) provides a positive coectio betwee the growth rate ad the rate of retur to capital as established by the supply side of the ecoomy. I a atio that does ot trade i assets with the rest of the world domestic cosumers determie a secod relatioship betwee the rate of retur to capital ad growth. (27)

7 From the cosumptio side the rate of retur ca be determied from the cosumer maximizatio problem which ivolves maximizig utility U give by: where D x ad D y represet quatities cosumed of goods X ad Y at ay give time t ad r is a rate of time preferece. Equatio (28) is maximized subject to a budget costrait statig the equality of icome ad expediture at ay time G. This optimizatio yields the followig coditio: r = ( E E)+ r FINANCIAL LIBERALIZATION CORRUPTION AND GROWTH 733 U = Ú exp[ - rt ( -t)] log U[ Dx() t Dy() t ] d t t where E is aggregate cosumptio expediture. But i the ecoomy s steady state as oted earlier cosumptio expediture will grow at g g ad therefore (28) (29) r = g g + r. (29 ) Equatios (27) ad (29 ) costitute a system of two equatios i two variables g ad r o. Solvig for the steady state growth rate results i g = [[( 1-a( 1-t* )] a [ 1-a( 1-t* )+ baa( 1-t* )] H -r[ aa( 1-t* ) b] [ 1-a( 1-t* )+ baa( 1-t* )]. (30) The rate of growth of the ecoomy is thus determied by the edowmet of huma capital (first term) ad the rate of time preferece (secod term). Note that the greater the edowmet of huma capital H the higher the growth rate holdig other thigs costat. I additio the greater the degree of corruptio t* the lower the rate of growth other thigs costat. 3. The Impact of Capital Accout Liberalizatio o Ecoomic Growth Cosider ow the situatio whe the ecoomy described i sectio 2 is opeed to iteratioal trade i assets. I this case domestic firms ad households ca both borrow ad led at the world iterest rate r*. Uder the assumptio of perfect capital mobility the domestic rate of retur to capital must equal the exogeously-give world iterest rare or r = r*. (31) This coditio replaces equatio (29 ) which o loger becomes relevat because the ecoomy s steady-state equilibrium does ot require that expediture be equal to icome at every momet (oly a itertemporal budget costrait must be satisfied). Usig equatio (27) the steady state growth rate after capital accout liberalizatio becomes [ ] with all the variables as defied earlier. Uder the assumptio that d is positive equatio (32) shows that the ecoomy s growth rate is positively affected by icreased huma capital (risig H) but egatively affected by a icrease i the world iterest rate r*. How does opeig the capital accout affect the ecoomy s growth rate? If the equilibrium rate of retur o capital before the liberalizatio r lies below r* the equatio (32) suggests that the growth rate will declie. The explaatio is that whe the capital accout is liberalized ad r < r* the capital flight will occur as domestic resig = { 1-a( 1-t* ) da } H - baa( 1-t* ) d r* [ ] (32)

8 734 Fracisco L. Rivera-Batiz dets ca fid higher rates of retur i the rest of the world. As households shift their ivestmets from domestic to foreig assets which yield a higher rate of retur domestic iovatio collapses ad the output growth rate (the umber of ew capital goods created) drops. At the ecoomy reaches a steady state after liberalizatio domestic rates of retur will alig with world rates of retur but at a lower output growth rate. Note that the higher the rate of corruptio the greater the tax rate t*. This reduces the ecoomy s rate of retur to capital before the liberalizatio ad makes it more likely that there will be capital flight from the ecoomy after the liberalizatio causig a drop i growth. O the other had the lower the level of corruptio i the ecoomy the less likely that this evet will occur ad istead opeig the capital accout will result i capital iflows that will stimulate iovatio techological chage ad growth. Iteratioal fiacial liberalizatio has distributioal effects as well. Cosider for example the case where the opeig leads to capital outflows. I this evet eve though the coutry s output growth rate declies asset holders will beefit from the higher iterest rate. But the icreased icome received by asset holders is matched by a fall both i the level ad the rate of icrease of the earigs of both skilled ad uskilled workers. The drop i the real icome of skilled ad uskilled labor is associated with the reductio i the amout of physical capital ivested i the coutry as a result of capital flight. The reductio i the growth rate of labor earigs is directly related to the drop i the rate of growth of output sice both are equal. Note that if the skilled ad uskilled workers were ot asset holders their ecoomic welfare would declie after the liberalizatio because their labor icome shrius. If they are asset holders; however their welfare may icrease depedig o the share of the coutry s assets that they ow Coclusios The impact of the liberalizatio of the capital accout o emergig markets has geerated heated cotroversy i recet years. The empirical work of Beck et al. (2000) Levie (this issue) Erruza (this issue) ad others suggests that iteratioal fiacial liberalizatio fosters ecoomic developmet ot oly by allowig developig atios to accumulate physical capital but also by improvig the domestic fiacial system ad stimulatig productivity growth. Others such as Krugma (1993) ad Rodrik (1998) fid o evidece of a coectio betwee icreased fiacial liberalizatio ad ecoomic developmet. I fact some have blamed the icreased globalizatio of capital flows for the rash of emergig market crises i the 1990s icludig the Mexica peso crisis ad its Tequila effect the East Asia crisis ad the Russia fiacial crisis ad its severe cotagio effects (see Radelet ad Sachs 1998; Eatwell ad Taylor 2000). This paper shows that iteratioal fiacial liberalizatio has ambiguous effects o the rate of growth of a developig ecoomy. Whether gais or losses i growth are realized depeds o whether the ecoomy beefits from a iflux of capital or suffers from a capital flight after the liberalizatio. If the rate of retur to capital before liberalizatio is comparatively low compared with world rates of retur the a opeig of the capital accout will result i capital flight ad a reductio of domestic growth. O the other had if the domestic rate of retur is high capital iflows will result that icrease growth. 8 The paper establishes a egative coectio betwee domestic corruptio ad the rate of retur to capital. As a result coutries where corruptio is rampat will suffer

9 FINANCIAL LIBERALIZATION CORRUPTION AND GROWTH 735 from low rates of retur to capital before the liberalizatio of iteratioal fiacial trasactios. Whe liberalizatio does occur capital flight erupts ad the ecoomy s growth rate declies. I low-corruptio coutries o the other had capital accout liberalizatio geerates positive growth effects. Capital flight has iduced policymakers i may poor coutries to itroduce capital ad exchage cotrols to block the outflows that would result if liberalizatio were to occur. This paper shows however that this is ot the first-best policy. Isofar as corruptio is behid the relatively low domestic rates of retur to capital the first-best policy i this cotext is to itervee to reduce or elimiate corruptio. Ideed improved goverace would result i a burst of growth sice it would allow domestic etrepreeurs ad iovators to be uboud from the chattels imposed by a corrupt regime eve i a closed ecoomy. As bribe requests are elimiated or cotrolled the returs to research ad developmet will boom fosterig techological chage. But eve more importatly a drop i corruptio allows a opeig of the capital accout to further beefit the domestic ecoomy. With a drop i corruptio the developig ecoomy s atural shortage of capital will reveal itself i high rates of retur to capital which would result i capital iflows as a result of iteratioal fiacial liberalizatio. O the other had itroducig capital accout liberalizatio without the appropriate domestic policies i place to improve goverace ad cotrol corruptio may result i a magificatio of domestic distortios ad a declie of ecoomic growth. Refereces Abalki Leoid ad Joh Whalley The Problem of Capital Flight from Russia mimeo Ceter for the Study of Iteratioal Ecoomic relatios Uiversity of Wester Otario (1999). Adam Christopher S. ad Stephe A. O Coell Aid Taxatio ad Developmet: Aalytical Perspectives o Aid Effectiveess i Sub-Sahara Africa mimeo Ceter for Study of Africa Ecoomies Oxford Uiversity (1997). Ageor Pierre-Richard ad Joshua Aizema Volatility ad the Welfare Costs of Fiacial Market Itegratio i P. R. Ageor M. Miller A. Weber ad D. Vies (eds.) The Asia Fiacial Crisis: Causes Cotagio ad Cosequeces Cambridge: Cambridge Uiversity Press (1999): Ajayi S. Ibi ad Mohsi S. Kha (eds.) Exteral Debt ad Capital Flight i Sub Sahara Africa Washigto D.C.: Iteratioal Moetary Fud (2000). Beck Thorste Ross Levie ad Norma Loayza Fiace ad the Sources of Growth Joural of Fiacial Ecoomics 58 (2000): Caprio Gerard Izak Atiyas ad James A. Haso (eds.) Fiacial Reform: Theory ad Practice Cambridge: Cambridge Uiversity Press (1994). Collier Paul Ake Hoeffler ad Catherie Pattillo Flight Capital as a Portfolio Choice World Bak Policy Research Workig Paper 2066 (1999). Cooper William H. ad Joh P. Hardt Russia Capital Flight Ecoomic Reforms ad US Iterests: A Aalysis Report for Cogress Cogressioal Research Service (2000). Cuddigto Joh T. Capital Flight: Issues Estimates ad Explaatios Priceto Studies i Iteratioal Fiace 58 (1986). Dooley Michael P. ad Keeth M. Kletzer Capital Flight Exteral Debt ad Domestic Policies Ecoomic Review of the Federal Reserve Bak of Sa Fracisco (1994): Eatwell Joh ad Lace Taylor Global Fiace at Risk: The Case for Iteratioal Regulatio New York: New Press (2000). Edwards Sebastia Crisis ad Reform i Lati America: From Despair to Hope Oxford: Oxford Uiversity Press (1995). Ehrlich Isaac ad T. Lui Bureaucratic Corruptio ad Edogeous Ecoomic Growth Joural of Political Ecoomy 107 (1999):S

10 736 Fracisco L. Rivera-Batiz Gray Cheryl W. ad Daiel Kaufma Corruptio ad Developmet Fiace ad Developmet (1998):7 10. Grossma Gee M. ad Elhaa Helpma Iovatio ad Growth i the Global Ecoomy Cambridge MA: MIT Press (1991a). Growth ad Welfare i a Small Ope Ecoomy i E. Helpma ad A. Razi (eds.) Iteratioal Trade ad Trade Policy Cambridge MA: MIT Press (1991b): Ito T. ad Ae Krueger (eds.) Fiacial Deregulatio ad Itegratio i East Asia Chicago: Uiversity of Chicago Press (1996): Kaufma Daiel Aart Kraay ad Pablo Zoido-Lobato Goverace Matters World Bak Policy Research Workig Paper 2196 (1999). Krugma Paul Iteratioal Fiace ad Ecoomic Developmet i A. Giovaii (ed.) Fiace ad Developmet: Issues ad Experiece Cambridge: Cambridge Uiversity Press (1993): Lessard Doald R. ad Joh Williamso Capital Flight ad Third World Debt Washigto DC: Istitute for Iteratioal Ecoomics (1987). Lucas Robert E. Why Capital Does t Flow from Rich to Poor Coutries America Ecoomic Review 80 (1990):92 6. Lukauskas Arvid ad Fracisco L. Rivera-Batiz (eds.) The Political Ecoomy of the East Asia Crisis ad Its Aftermath: Tigers i Distress Chelteham: Edward Elgar (2001). Mauro Paolo Corruptio ad Growth Quarterly Joural of Ecoomics 110 (1995): Obstfeld Maurice The Global Capital Market: Beefactor or Meace? Joural of Ecoomic Perspectives 12 (1998):9 30. Radelet Steve ad Jeffrey Sachs The East Asia Fiacial Crisis: Diagosis Remedies ad Prospects Brookigs Papers o Ecoomic Activity (1998):1 74. Rivera-Batiz Fracisco L. Modelig Capital Flight from Lati America: A Portfolio Balace Approach Modelig ad Simulatio 14 (1987): The Ecoomics of Techological Progress ad Edogeous Growth i Ope Ecoomies i Has-Eckart Scharrer (ed.) The Ecoomics of High Techology Competitio ad Cooperatio i Global Markets Hamburg: Istitut für Wirtschaftsforschug (1996): Trade Liberalizatio ad the Iteratioal Distributio of the Gais from Growth i Satya Dev Gupta ad Nada K. Choudhry (eds.) Globalizatio ad Developmet: Growth Equity ad Sustaiability Bosto: Kluwer Academic (1997): Rivera-Batiz Luis A. ad Paul M. Romer Ecoomic Itegratio ad Edogeous Growth Quarterly Joural of Ecoomics 106 (1991): Rodrik Dai Who Needs Capital Accout Covertibility? i Essays i Iteratioal Fiace vol. 207 Priceto Uiversity Departmet of Ecoomics Iteratioal Fiace Sectio (1998). Romer Paul M. Edogeous Techological Chage Joural of Political Ecoomy 90 (1990a):S Trade Politics ad Growth i a Small Less Developed Ecoomy mimeo Departmet of Ecoomics Uiversity of Chicago (1990b). Schieller Lisa A Ecoometric Model of Capital Flight from Developig Coutries IFDP Paper 579 Iteratioal Fiace Divisio Board of Goverors Federal Reserve Board (1997). Shleifer Adrei ad Robert Vishy The Grabbig Had: Govermet Pathologies ad Their Cures Cambridge: Harvard Uiversity Press (1998). Notes 1. A broad discussio of capital accout liberalizatio i developig coutries is preseted i Lukauskas ad Rivera-Batiz (2001) Ito ad Krueger (1996) Edwards (1995) ad Caprio et al. (1994).

11 FINANCIAL LIBERALIZATION CORRUPTION AND GROWTH Theoretical ad empirical models of capital flight are preseted i Collier et al. (1999) Schieller (1997) Dooley ad Kletzer (1994) Lessard ad Williamso (1987) Rivera-Batiz (1987) ad Cuddigto (1986). 3. See Gray ad Kaufma (1998) Adam ad O Coell (1997) ad Shleifer ad Vishy (1998). 4. See Kaufma et al. (1999) Ehrlich ad Lui (1999) ad Mauro (1995). 5. The model is based o edogeous growth models of the ope ecoomy such as Grossma ad Helpma (1991ab); see also Rivera-Batiz ad Romer (1991) ad Rivera-Batiz ( ). 6. This requires that the expoet g be small eough or the parameter a i the capital goods sub-productio fuctio be large eough to sustai a positive d. This meas that the icreasig returs i the productio of capital goods which are directly related to a are bouded. 7. See Romer (1990b) for a discussio of this case. 8. I differet models the dagers of iteratioal fiacial liberalizatio i the presece of domestic distortios have bee examied by Detragiache (this issue) ad Ageor ad Aizema (1999).