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Evidence From Two Eras of Financial Globalization

Does international financial integration boost economic growth? The empirical literature has not yet established a robust link between openness to the international capital market and economic growth. In this paper we turn to the economic history of the first era of financial globalization (1880-1914) for new insights. Based on a newly compiled comprehensive data set, we test if capital market integration had a positive impact on economic growth in the first era of global finance. Using identical empirical models and techniques as contemporary studies, we find a significant growth effect which remains robust to a number of alternative specifications. To account for this finding, we show that a key difference between now and then is that opening up to the international market led to massive net capital movements and higher investment in the historical period, but no longer does so today. Unlike its historical predecessor, the current wave of financial globalization has not incited large investment augmenting flows of capital from rich to poor economies.