Shanker Satyanath and Daniel Berger
Quarterly Journal of Political Science, Vol. 2, No. 4, 307-324.
Capital Controls, Political Institutions, and Economic Growth
The case study literature suggests that liberal international capital flows can have extremely different growth consequences depending on the political environment. Despite this, little systematic attention has been paid to how politics affects the relationship between capital controls and long term growth in a large-n context. Focusing on the conflict alleviating properties of democracy we demonstrate that authoritarian countries with a large number of societal divisions are negatively affected by capital controls, while neither democratic nor homogeneous countries suffer adverse growth effects from capital controls. We also challenge the prevailing wisdom on the causal links between capital controls, investment, and growth, systematically addressing the concerns of measurement error, reverse causation, and omitted variables bias that make it difficult to accurately assess the causal effects of capital controls. Our results suggest that the decision to liberalize capital flows should take careful account of both the political and societal context.