These measures include a greater openness to international trade, the privatization of state-owned enterprises, and a welcome mat for foreign investors. Under those circumstances, most economists tend to emphasize the gains from more international trade. What's intriguing about the Bekaert, Harvey, and Lundblad study is that, after using various econometric techniques, it concludes that opening up a country's equity markets pays off big in addition to any other market-opening moves for goods and services. The source of that improved growth trajectory is mostly increased investment, not greater consumption. The flow of foreign money both funds new investment projects and lowers the overall cost of domestic capital, which, in turn, encourages even more investment.
History offers an intriguing example that echoes their statistics-laden research.
America was essentially bankrupt in the 1780s. Yet over the next four decades, the fledgling nation evolved into the most successful emerging market in history. Yet, as economists Peter L. Rousseau of Vanderbilt University and Richard Sylla of New York University point out in their paper Emerging Financial Markets and Early U.S. Growth , America, Canada, Mexico, Brazil, Argentina, and several other New World economies shared similar technologies, transportation infrastructure, and open frontiers. They argue that only the U.S. had a vibrant stock market and competitive banking system. To be sure, the U.S. suffered through periodic financial crises.