Does financial integration spur economic growth?

Does international financial integration boost economic growth? According to a recent study by economists Moritx Schularick and Thomas M. Steger, international capital market integration fostered economic growth significantly in the historical period, but no longer does so today. Schularick and Steger argue that the historical period (roughly 1870 - 1914), in stark contrast to the post-World War II period, was characterised by:

Low differentials in property rights protection between countries

A (comparably) stable monetary environment

A higher degree of net capital mobility

Substantial (net) capital movements from rich (core) to poor (peripheral) regions.

The results draw the conclusion that those economies that open themselves to the world economy need to first abolish domestic distortions to reap the benefits of globalisation. More specifically, it seems especially important to establish good property rights in all economies participating in the world economy, say Schularick and Steger.

Source: Moritx Schularick and Thomas M. Steger, Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization, Swiss Federal Institute of Technology Zurich, Working Paper 06/46, March 2006.

For text: http://www.cer.ethz.ch/research/wp_06_46.pdf

For more on Economics: http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 13 June 2006