Capital Account Liberalisation and Poverty: How Close Is the Link?

Abstract

The literature on the theoretical and empirical aspects of the relationship between finance and economic growth is both substantial and extensive. The same cannot be said on the relationship between financial development and poverty reduction-an equally important aspect. In this study, we visit the theoretical arguments and conduct an empirical analysis of the relationship between the capital account dimension of financial liberalisation and poverty for developing countries for the period 1985-2005. In particular, we employ the 'system GMM' technique to test whether capital account liberalisation has helped alleviate poverty, and also whether the extent to which capital account liberalisation affects poverty depends on the quality of institutions. We also use OLS and IV techniques to verify our findings. Our findings indicate that there is no statistically significant relationship between the degree of capital account liberalisation during the period and the poverty rate. Developing countries with higher institutional quality have lower poverty rates, but the effect has low statistical significance. A higher degree of capital account liberalisation is associated with a lower income share for the poor.