**Table 4. Financial Integration and** **<u>Growth—De Jure and De Facto Measures</u>**

|_Growth regressions_||||Dep|endent variable<br>of real GD|is four-year av<br>Pper capita(P|erage growth<br>PP)|||
|---|---|---|---|---|---|---|---|---|---|
|_Explanatory variable_|[1]||[2]|[3]|[4]|[5]|[6]|[7]|[8]|
|Log of initial GDP per<br>|-2.440||-2.612|-2.576|-2.560|-1.926|-1.895|-2.049|-2.097|
|capita<sup>[A]</sup><br>|[0.436]<br>|***|[0.405]<br>|***<br>[0.430]<br>|*** [0.455]<br>|*** [0.413]<br>|*** [0.415]<br>|***<br>[0.395]<br>|*** [0.409] ***<br>|
|Educational attainment;|0.515||0.556|0.542|0.519|0.435|0.432|0.444|0.463|
|pop. above 25|[0.114]|***|[0.105]|***<br>[0.109]|*** [0.120]|**<br>[0.113]|*** [0.113]|***<br>[0.118]|*** [0.121] ***|
|Population growth|-0.359||-0.334|-0.331|-0.377|-0.389|-0.421|-0.405|-0.400|
||[0.134]|***|[0.126]|***<br>[0.147]|**<br>[0.156]|**<br>[0.158]|**<br>[0.160]|**<br>[0.159]|**<br>[0.165] **|
|Relative price of|0.255||0.090|0.063|0.088|0.291|0.363|0.256|0.171|
|investment|[0.314]||[0.326]|[0.425]|[0.391]|[0.474]|[0.458]|[0.482]|[0.521]|
|Trade openness (in|0.009||0.009|0.009|0.009|0.011|0.010|0.012|0.012|
|percent of GDP)|[0.004]|**|[0.004]|**<br>[0.004]|**<br>[0.004]|**<br>[0.004]|*** [0.004]|***<br>[0.003]|*** [0.004] ***|
|_De jure_financial|0.190||0.167|0.222|0.238|||||
|openness (KAOPEN)|[0.126]||[0.118]|[0.156]|[0.180]|||||
|EU10 country times|0.526||||0.450|||||
|KAOPEN|[0.920]||||[0.872]|||||
|EU candidates country|||0.111||0.044|||||
|times KAOPEN|||[1.164]||[1.191]|||||
|EU neighborhood||||-3.555|-4.076|||||
|times KAOPEN||||[6.018]|[6.165]|||||
|_De facto_financial||||||0.000|0.000|0.000|0.000|
|openness (FINOPEN)||||||[0.001]|[0.001]|[0.001]|[0.001]|
|EU10 country times||||||0.002|||0.003|
|FINOPEN||||||[0.011]|||[0.011]|
|EU candidates country|||||||0.018||0.018|
|times FINOPEN|||||||[0.006]|***|[0.006] ***|
|EU neighborhood times||||||||-0.123|0.124|
|FINOPEN||||||||[0.200]|[0.190]|
|Common intercept|21.064||22.484|24.308|22.395|16.906|16.663|17.954|18.428|
||[3.705]|***|[3.516]|***<br>[3.789]|*** [3.961]|*** [3.592]|*** [3.631]|***<br>[3.364]|*** [3.529] ***|
|Number of observ.|564||564|564|564|564|<br>564|<br>564|<br>564|
|Number of countries|86||86|86|86|86|<br>86|86|86|
|Number of instruments|41||38|36|53|41|37|36|52|
|Hansen test for over-|0.222||0.235|0.085<sup>[B]</sup>|0.296|0.159|0.129|0.093<sup>[B]</sup>|0.380|
|identifying restrictions||||||||||
|AB AR(1) test|0.000||0.000|0.000|0.000|0.000|0.000|0.000|0.000|
|AB AR(2)test|0.969||0.880|0.932|0.885|0.972|0.967|0.997|0.985|

Notes:<sup>[A]</sup> GDP data are adjusted for international differences in purchasing power of the dollar.<sup>[B]</sup> When the p-value of the Hansen test is a borderline case, the instruments are further validated by the supplementary evidence from the Sargan test of the over-identifying restrictions. Robust standard errors in parentheses; asterisks indicate statistical significance at the ***1, **5, and *10 percent level. Data for the transition economies refer only from 1997 onwards. All equations include time period and group-specific dummies.

# **5. Foreign Savings and Growth Channels**

# _<u>How Do Foreign Savings Support Growth in Emerging Europe?</u>_

So far we have established that foreign savings support growth in many—but not all—emerging European countries. In a growth equation, the interactions between current account balances and two of the EU-specific country groups mentioned before have a negative and statistically significant point estimate. The coefficient for the EU10 has a larger magnitude (in absolute value) than is the case for EU candidate countries; in other words, a stronger link between foreign savings and growth appears to exist among the EU10 countries (Table 2, column 5). The varying strength in the relationship across these two groups of countries is in itself interesting. It could perhaps reflect a combination of early EU accession and more rapid transition to a market economy. It is also worth noting that countries where EU membership prospects are still 16