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Capital Account Liberalization, Political Stability, and Economic Growth

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Abstract

Our main purpose in this paper is first to study the interaction between capital account liberalization and political stability in affecting financial stability and so economic growth. Second, our contribution consists in decomposing both the effect of capital account liberalization and political stability into a direct effect on growth and an indirect effect through affecting financial system efficiency and stability. We show that the aggregate positive effect of political stability outweighs the negative partial or temporary effect. However, the total effect of capital account liberalization is negative and economic repressing. Our economic approach is firstly based on a growth traditional model conducted through a simple panel data regression, and then we used a logit model to identify potential determinants of financial crisis including interaction term. This methodology permits us to augment the growth model by a crisis model obtaining treatment effect specification necessary to decompose the total effect of our variables of interests. We conclude that the impact of capital account liberalization on growth depends on the political stability and that political stability is more needed to stimulate economic growth in less-liberalized countries. Capital account increases economic growth rate only in politically unstable countries where needs for capital is high.

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Notes

  1. Kutner, M. H.; Nachtsheim, C. J.; Neter, J. (2004). Applied Linear Regression Models (4th ed.). McGraw-Hill Irwin.

  2. Not presented here because of paper length.

  3. For a summary of recent empirical findings see Jemovic and Marinkovic 2019

  4. This method considers a calm situation (Yit=0) or a crisis situation (Yit = 1) and not an intermediate situation.

  5. For the paper length and to avoid redundancy, the model to be estimated is presented after Table 6.

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Authors and Affiliations

  1. Faculty of Economic Sciences and Management of Tunis (FSEGT), Modeling, Financing and Economic Development (MOFID-UR13ES60), University of Tunis El Manar, Tunis, Tunisia

    Mekki Hamdaoui

  2. Faculty of Economic Sciences and Management of Sousse (FSEGS), University of Sousse, Sousse, Tunisia

    Saif Eddine Ayouni

  3. Faculty of Economic Sciences and Management of Tunis (FSEGT), University of Tunis El Manar, Tunis, Tunisia

    Samir Maktouf

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Appendix

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Table 10 Data description
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Table 11 Financial crisis list (Since our sample would be biased if certain country characteristics that may explain why some countries are more prone to systemic crises than others also affect the duration of the crisis itself, we also include a control group of countries that do not have experienced any crisis at all during the sample period.)
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Hamdaoui, M., Ayouni, S.E. & Maktouf, S. Capital Account Liberalization, Political Stability, and Economic Growth. J Knowl Econ 13, 723–772 (2022). https://doi.org/10.1007/s13132-021-00723-y

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