Effects of increased global trade financial integration implications for India

Abstract

Over the recent years, research has highlighted that enhanced openness to trade and financial integration do not necessarily lead to improved growth outcomes. This paper studies cross-country data from 80 economies (30 advanced, 50 developing) over 1970-2015 to investigate the empirics behind these findings. The objective is to understand the impact of openness to trade and capital flows on the per capita growth in income. The findings reveal that trade openness usually has a positive impact on growth, irrespective of whether the country is developed or developing economy. However, the experience with capital account openness has been mixed. For developing economies, we could not find any significant impact of capital account openness on income growth. However, we find a slightly positive impact of capital account openness on growth of developed economies that declines with rising income levels. The paper also attempts at exploring what reasons could explain this empirical observation, and discuss specifically, the circumstances under which financial integration leads to enhanced or reduced growth.