Measuring Capital Mobility in Developing Economies

Abstract

Part III of this volume — devoted to empirical studies of foreign capital in developing economies — starts with a chapter on capital mobility. The definition, and measurement, of the degree of integration in international capital markets is a widely debated issue with a number of related policy implications. Moreover, the evaluation of capital mobility in developing economies is a crucial prerequisite for the subsequent analyses of the determinants and consequences of capital flows in developing countries (DCs). If an individual economy is found to be insulated from world capital markets, it makes little sense to establish the role of foreign capital there. Conversely, if DCs are relatively well integrated in the international financial network, questions concerning the functions of capital flows become very relevant. The chapter is organised as follows: we first provide an introduction to the concept of capital mobility and highlight its major implications in terms of intertemporal allocation, financial diversification and economic policy (Section 5.1). We then review the debate on the measurement of capital mobility (Section 5.2). This is a ‘hot’ topic as many operational definitions and alternative empirical tests exist. A new methodology based on time-series econometrics is introduced in Section 5.3, and applied to the assessment of capital mobility in 33 DCs over 1960–88. In general, we cannot reject the hypothesis that several developing economies were integrated in international capital markets in this period. Some details on the statistical procedures adopted and the data sources can be found at the end of the chapter.