ABSTRACT
Cross-border capital flows (measured by gross capital inflows worldwide) have been growing at an average rate of 16% a year since 1994 (Figure ES.1), much faster than world trade or world gross domestic product (GDP). With the volume of cross-border capital flows on the rise, cross-border holdings of financial assets have also increased sharply (Figure ES.2). In theory, integrating financially with the world economy can bring numerous benefits to a country, from a lower cost of capital and enhanced risk-sharing to greater discipline of the government, banks, and non-bank corporations. In practice, however, the positive effects of financial integration on economic growth have proven elusive to identify convincingly in the data. After surveying a vast literature of empirical studies, Kose et al. (2003, 2010) concluded that there is no strong, robust, and causal effect of financial integration on economic growth for a typical developing country.
