Does Capital Account Liberalization Spur Economic and Financial Performance? New Investigation for MENA Countries

FEM33-06 | May 2011

Title

« Does Capital Account Liberalization Spur Economic and Financial Performance? New Investigation for MENA Countries »

By

Mondher Cherif, ESC Sfax

Contributeurs

Samy Ben Naceur – ESSEC Tunis (Tunisia), Mohamed Goaied – Université du 7 novembre à Carthage (Tunisia), Bassem Kamar International University of Monaco (Monaco)

Note :

This document has been produced with the financial assistance of the European Union within the context of the FEMISE program. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union.

Summary :

This project will focus on assessing the impact of capital account openness on the economic performance of MENA countries. Our approach will be multidimensional since we will focus both on the real economy and on the financial sectorThe first objective of this study is to understand why some countries liberalize their capital account and others not, and how the speed of the liberalization process could be explained.. The second objective is to investigate the controversial impact of capital account liberalization on the real economy, especially its incidence on economic growth, competitiveness and foreign direct investment. The last objective is to assess the incidence of capital openness on the financial sector through its impact on banking sector development.Main results of the project

  • Both measures of capital account liberalization have a significant positive impact on growth, while banking crisis has a significant negative impact. These results indicate that in MENA countries capital account liberalization strongly contributed to enhancing growth, which is in line with many researches, such Honig (2008) and Quinn et al. (2008). This positive impact can be explained by the fact that the majority of MENA countries adopted partial capital account liberalization as explained by Ben Gamra (2009). Another explanation could be that MENA countries’ institutions are of good quality (Klein, 2005). 
  • Both measures of capital account liberalization have the expected significant positive impact on competitiveness, which is in line with the Dutch Disease phenomenon and the findings of previous research (see Bakardzhieva et. al, 2010, for a thorough analysis of capital flows on competitiveness).
  • In our models, capital account liberalization has a significant positive impact on FDI that could be explained by the fact that investors look for the assurance that they can repatriate their investment at any time so they prefer to invest in countries with more open capital account.
  • There is clear evidence that capital account liberalization has a significant positive impact on financial development, regardless of the proxies we used in our models; except when using the IMF capital account liberalization measure with credit to private sector: then the significance is only at 10% level. These expected results confirm the wisdom that growing two-way capital flows indicate an increasing integration with international capital markets, which increases the pressures for strengthening the institutional infrastructure of the domestic financial sector.