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1. ASEAN: Historical Background and Objectives The Association of Southeast Asian Nations (ASEAN) was founded in Bangkok on 8 August 1967. It was originally designed as a political entity to [...]

Born in Air Itam, Penang, Malaysia, the late Latifah Merican Cheong who passed away on 22 June 2018 was a beacon of monetary policy in Malaysia. Her early schooling was [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jdeveco.2008.06.011 Byline: Roberto Chang (a)(b), Linda Kaltani (c), Norman V. Loayza (d) Keywords: Openness; Growth; Economic reform; Policy complementarity Abstract: This paper studies how the effect of trade openness on economic growth may depend on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where welfare gains after trade openness depend on the degree of labor market flexibility. The paper then presents cross-country, panel-data evidence on how the growth effect of openness may depend on a variety of structural characteristics. For this purpose, the empirical section uses a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor market flexibility, ease of firm entry, and ease of firm exit. The paper concludes that the growth effects of openness may be significantly improved if certain complementary reforms are undertaken. Author Affiliation: (a) Rutgers University, United States (b) NBER, United States (c) International Monetary Fund, United States (d) The World Bank, United States Article History: Received 15 August 2006; Revised 30 May 2008; Accepted 12 June 2008 Article Note: (footnote) [star] We gratefully acknowledge the valuable support of the World Bank's Poverty Reduction and Economic Management Network. We are also grateful to Cesar Calderon, Romulo Chumacero, Marco Cipriani, Mieke Meurs, Lant Pritchett, Romain Ranciere, Klaus Schmidt-Hebbel, Luis Serven, Vicente Tuesta, Roberto Zhaga, two anonymous referees, and seminar participants at George Washington University, Villanova University, the World Bank, the Central Bank of Chile, the Central Bank of Peru, the Federal Reserve Bank of Philadelphia, and the Tenth Conference of Dynamics, Growth, and International Trade for valuable comments and suggestions. Finally, Chang thanks the hospitality and financial support of Princeton University. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the World Bank, their Boards of Directors, or the countries they represent.

This paper studies the apparent contradition between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g., Levine, Loayza, and Beck 2000). On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminsky and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short- and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short- and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a mostly negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models by linking the estimated short-run effects to measures of financial fragility (namely, banking crises and financial volatility) and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions. JEL codes: E44, O16, 040 Keywords: financial development, banking crisis, economic growth, volatility., THIS PAPER ANALYZES the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds [...]