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International Monetary Fund. External Relations Dept.

Korea’s economic strength testifies to its success in adapting to the changing global economic landscape by pursuing forward-looking and prudent policies. While near-term economic prospects are generally favorable, risks are mainly to the downside.

Mr. Ayhan Kose, Mr. Kenneth Rogoff, Mr. Eswar S Prasad, and Shang-Jin Wei

Abstract

This study provides a candid, systematic, and critical review of recent evidence on this complex subject. Based on a review of the literature and some new empirical evidence, it finds that (1) in spite of an apparently strong theoretical presumption, it is difficult to detect a strong and robust causal relationship between financial integration and economic growth; (2) contrary to theoretical predictions, financial integration appears to be associated with increases in consumption volatility (both in absolute terms and relative to income volatility) in many developing countries; and (3) there appear to be threshold effects in both of these relationships, which may be related to absorptive capacity. Some recent evidence suggests that sound macroeconomic frameworks and, in particular, good governance are both quantitatively and qualitatively important in affecting developing countries’ experiences with financial globalization.

Mr. Ayhan Kose, Mr. Kenneth Rogoff, Mr. Eswar S Prasad, and Shang-Jin Wei

Abstract

This study provides a candid, systematic, and critical review of recent evidence on this complex subject. Based on a review of the literature and some new empirical evidence, it finds that (1) in spite of an apparently strong theoretical presumption, it is difficult to detect a strong and robust causal relationship between financial integration and economic growth; (2) contrary to theoretical predictions, financial integration appears to be associated with increases in consumption volatility (both in absolute terms and relative to income volatility) in many developing countries; and (3) there appear to be threshold effects in both of these relationships, which may be related to absorptive capacity. Some recent evidence suggests that sound macroeconomic frameworks and, in particular, good governance are both quantitatively and qualitatively important in affecting developing countries’ experiences with financial globalization.

Mr. Ayhan Kose, Mr. Kenneth Rogoff, Mr. Eswar S Prasad, and Shang-Jin Wei

Abstract

The recent wave of financial globalization that has occurred since the mid-1980s has been marked by a surge in capital flows among industrial countries and, more notably, between industrial and developing countries. Although capital inflows have been associated with high growth rates in some developing countries, a number of them have also experienced periodic collapses in growth rates and significant financial crises that have had substantial macroeconomic and social costs. As a result, an intense debate has emerged in both academic and policy circles on the effects of financial integration on developing economies. But much of the debate has been based on only casual and limited empirical evidence.

Mr. Giovanni Dell'Ariccia, Mr. Paolo Mauro, Mr. Andre Faria, Mr. Jonathan David Ostry, Mr. Julian Di Giovanni, Mr. Martin Schindler, Mr. Ayhan Kose, and Mr. Marco Terrones

Abstract

Financial globalization—defined as the extent to which countries are linked through cross-border financial holdings, and proxied in this paper by the sum of countries' gross external assets and liabilities relative to GDP—has increased dramatically over the past three decades. This trend has been particularly pronounced in advanced economies, with emerging market and developing countries having experienced more moderate increases in their external stock positions over the period. These diverging trends stem from different capital control regimes, as well as from a range of persistent factors, including different degrees of institutional quality and domestic financial development. Persistent factors related to geography and historical linkages—though they can be mitigated to some extent by greater financial market and corporate sector transparency—also help to explain different degrees of financial openness across the IMF's membership.

Mr. Ayhan Kose, Mr. Kenneth Rogoff, Mr. Eswar S Prasad, and Shang-Jin Wei

Abstract

Measures of de jure restrictions on capital flows and actual capital flows across national borders are two indicators of the extent of a country’s financial integration with the global economy. Understanding the differences between them is important when evaluating the effects of financial integration. By either measure, developing countries’ financial linkages with the global economy have risen in recent years.1 A relatively small group of developing countries, however, has garnered the lion’s share of private capital flows from industrial to developing countries, which surged in the 1990s. Structural factors, including demographic shifts in industrial countries, are likely to provide an impetus to these North-South flows over the medium and long terms.

Mr. Giovanni Dell'Ariccia, Mr. Paolo Mauro, Mr. Andre Faria, Mr. Jonathan David Ostry, Mr. Julian Di Giovanni, Mr. Martin Schindler, Mr. Ayhan Kose, and Mr. Marco Terrones

Abstract

Financial globalization—defined as the extent to which countries are linked through cross-border financial holdings, and proxied in this paper by the sum of countries' gross external assets and liabilities relative to GDP (see Box 2.1)—has made the interaction between international financial flows and domestic financial and macroeconomic stability an increasingly central issue for Fund surveillance.1 In discharging its mandate, a key issue for the IMF is to advise member countries about how they can reap the benefits of international financial integration while limiting its potentially harmful effects on macroeconomic volatility and crisis propensity. On various occasions—including in the context of discussions of recent Biennial Surveillance Reviews (IMF, 2004) and the Independent Evaluation Office's report on the Fund's approach to capital account liberalization (IEO, 2005)—Executive Directors have called upon staff to undertake further research into the issue of managing the risks associated with international financial integration in a way that maximizes the net benefits. The present paper focuses on policies and reforms that can be carried out by recipient countries (and especially emerging market and developing countries), with issues related to the role of macroeconomic and prudential policies in source countries being left to later analysis.2

Mr. Ayhan Kose, Mr. Kenneth Rogoff, Mr. Eswar S Prasad, and Shang-Jin Wei

Abstract

Theoretical models have identified a number of channels through which international financial integration can help to promote economic growth in the developing world. It has proven difficult, however, to empirically identify a strong and robust causal relationship between financial integration and growth.

Mr. Giovanni Dell'Ariccia, Mr. Paolo Mauro, Mr. Andre Faria, Mr. Jonathan David Ostry, Mr. Julian Di Giovanni, Mr. Martin Schindler, Mr. Ayhan Kose, and Mr. Marco Terrones

Abstract

The global economy has become substantially more financially integrated over the past three decades. Average de facto financial globalization (measured, as discussed in Box 2.1, by gross external assets and liabilities as a share of GDP) has approximately tripled since the mid-1970s. Experience has differed by income group: the worldwide increase in financial globalization has been driven mainly by high-income countries, where financial integration has accelerated since the early 1990s (Figure 3.1). Although low- and middle-income countries have also become more financially integrated, average increases have been more moderate. Regionally, many countries in developing and emerging East Asia as well as in Eastern and Central Europe have displayed relatively large increases in international financial integration—sixfold and threefold, respectively, on average, compared with a twofold increase in the low- and middle-income countries as a whole.

Mr. Mohsin S. Khan, Mr. Stanley Fischer, and Mr. Ernesto Hernández-Catá
This paper examines the experience of Sub-Saharan Africa (SSA) to answer the question of whether the region is at a turning point in its economic fortunes. The improvement in growth reflects in part a rise in the utilization of existing capacity. To be sustained, however, a high rate of growth will require an increase in investment rates and/or an increase in total factor productivity—i.e., an improvement in the technological, political, administrative and economic factors that raise the rate of return on both capital and labor. The close link between investment and growth in developing countries over the long term is evident in the empirical growth literature. For developing countries in general, the elasticity of growth with respect to the investment/GDP ratio has been found to lie within the range of 0.3–0.5. Although increasing investment is crucial, action is also needed in many complementary areas in order to raise productivity and growth.