Financial Liberalization, Political Openness and Growth in Developing Countries: Relationship and Transmission Channels

Abstract

The purpose of this paper is to study the relationship between financial integration, political openness, and economic development measured with GDP per capita growth. Our empirical investigation covers a sample of 108 developing countries between 1984 and 2008 and uses both static and dynamic panel data estimation. The results show that financial liberalization positively affects growth directly and through indirect channel like investment, trade and macroeconomic stability. It also supports financial development and promotes human capital. Even though democracy doesni¯t directly influence growth, it has an indirect positive effect on it through favoring international trade in addition to financial and human capital development. Otherwise, political instability negatively affects growth directly and indirectly through decreasing investment and increasing inflation.