The standard line is that Chile and China have avoided crack-ups — of the sort that plagued Thailand, Indonesia, and Argentina — by restricting the free flow of capital in and out of their country. Kenneth Rogoff and co-authors now offer a very serious 92-page look at whether such views are true. Their conclusions include:
The majority of empirical studies are unable to find robust evidence in support of the growth benefits of capital account liberalization. However, studies that use measures of de facto integration or finer measures of de jure integration tend to find more positive results. More importantly, studies using micro data are better able to detect the growth and productivity gains stemming from financial integration.
There is little formal empirical evidence to support the oft-cited claims that financial globalization in and of itself is responsible for the spate of financial crises that the world has seen over the last three decades.
The conceptual framework we present suggests that in addition to the traditional channels (e.g., capital accumulation), the growth and stability benefits of financial globalization are also realized through a broad set of “collateral benefits”…These collateral benefits affect growth and stability dynamics indirectly, implying that the associated macroeconomic gains may not be fully evident in the short run and may be difficult to uncover in cross-country regressions.
How does the argument here work? First, liberalization tends to bring growth, which offers long-term protection against crises. Banking crises tend to be more disruptive than currency crises and also tend to precede them; free capital markets are not usually at fault in those cases. Plenty of countries with capital controls have gotten into big messes. Macro-volatility has been declining as the world has become more integrated in terms of capital flows.
I wish this piece had looked at the (supposedly?) negative instance of free capital movements more closely, but still it shifted my priors [correction: posteriors] on the issue.