Capital Account Liberalization and Economic Growth:he Case of Taiwan
Date Issued
2009
Date
2009
Author(s)
Tseng, Ming-Yen
Abstract
The widespread capital account liberalization (CAL henceforth) has shed a strong influence on most developing countries since mid-80s. According to neoclassical growth theory, CAL should help lift per capita output and consumption in developing countries. However, empirical studies fail to give a definite result. In fact, many developing countries have encountered various kinds of financial crisis after opening up capital account. Taiwan has not been absent in the CAL movement, the economic performance after CAL were in general at odds with what the theory tells us. Specifically, economic growth rate has followed a downward trend ever since. The reasons why it happened have yet to be scrutinized.n this dissertation I started with a discussion of the evolution of global CAL and the development of CAL in Taiwan, aiming to find a link between them. I found that in addition to the pressures from the US and the initiatives of international organizations, endogenous forces should not be ruled out in understanding the underpinning factors in Taiwan’s CAL. Secondly, Taiwan adopted a gradualism approach in opening up its capital account namely not before it had enjoyed a huge amount of current account surplus and moved forward step by step. Thirdly, Taiwan experienced capital outflow rather than inflow after CAL. This should be due to the coexistence of capital control and excess domestic savings before CAL.n intertemporal model is built in chapter two to derive the effects of CAL on macroeconomic variables. A model calibration exercise has been performed by applying Taiwan’s data. Several findings are concluded as the following: Firstly, the effect of CAL on per capita income and consumption lies heavily on the efficiency of its financial market. This result echoes the proposition that the issue of optimal sequencing should not be left aside in the process of economic liberalization. Secondly, per capita income and consumption may not decline in the case of capital outflow as long as the magnitude of increase in domestic interest rate is lower than that of capital outflow. Thirdly, it takes time for the effects of liberalization to be fully materialized. Lastly, a higher output elasticity of capital implies a lower rate of adjustment. This result lends support to the convergence theory initiated by most development economists.n chapter three I investigate the macroeconomic effects of CAL by performing event study of “de facto” liberalization. I found that Taiwan has in general experienced a long period of negative output gap ever since it lifted foreign exchange controls in mid-80s. Secondly, the rate of investment growth has plummeted except for 1990s with a higher volatility. Furthermore, the opening up of security market beginning from early 90s proved to have no effect on lifting stock prices, and either the dividend yield or Tobin’s q has pointed to the failure of CAL in lowering the cost of capital. Thirdly, CAL has no effect on brining down correlation of output with and among its components.n chapter four I probed into the effects of capital flows on macroeconomic variables, and investigate the so called boom-bust cycle and the co-movement phenomena among Taiwan and her major trading partners or competitors. It was found that Taiwan did not have any problem in the supply of investment funds prior to it lifting foreign exchange controls back in mid-80s. We can even observe capital outflow in early 1990s when it opened up its security market. However, autonomous capital flows became evident as a result of CAL. The impulse responses of macroeconomic variables to autonomous capital flows were not significant though except for foreign exchange reserves and money supply M2. Thirdly, I found that CAL did not result in boom-bust cycle because it had not brought in massive capital inflows. Last but not least, the correlation of GDP between Taiwan and the US or Japan has been declining while increasing with China in the past two decades.
Subjects
capital account liberalization
financial crisis
gradualism
sequencing of liberalization
convergence theory
calibration
event study
de facto liberalization
output gap
cost of capital
impulse response
boom-bust cycle
co-movement
SDGs
Type
thesis
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