proceeds.<sup>8</sup> As presented in the first four columns of Table 4, there appears to be no systematic relationship between capital controls (referred to as KAOPEN in the table) and medium-term economic growth.

**Table** **<u>3. Foreign Capital and Growth—A Stock Perspective (Net Foreign Assets)</u>**

|_Growth regressions_<br>|||Depende<br>|nt varia<br>of real|ble is four-y<br>GDPper ca|ear ave<br>pita(PP|rage growt<br>P)|h|||
|---|---|---|---|---|---|---|---|---|---|---|
|_Explanatory variable_|[1]||[2]||[3]||[4]||[5]||
|Log of initial GDP per capita<sup>[A]</sup>|-2.692||-2.770||-2.695||-2.237||-2.638||
||[0.458]|***|[0.464]|***|[0.471]|***|[0.517]|***|[0.541]|***|
|Educational attainment; pop > 25|0.532||0.534||0.534||0.378||0.459||
||[0.121]|***|[0.120]|***|[0.122]|***|[0.149]|**|[0.152]|***|
|Population growth|-0.296||-0.287||-0.317||-0.299||-0.294||
||[0.166]|*|[0.170]|*|[0.171]|*|[0.169]|*|[0.172]|*|
|Relative price of investment|-0.549||-0.635||-0.541||-0.960||-1.130||
||[0.508]||[0.507]||[0.526]||[0.522]|*|[0.560]|*|
|Trade openness (in percent of GDP)|0.010||0.009||0.010||0.008||0.008||
||[0.003]|***|[0.004]|**|[0.003]|***|[0.003]|***|[0.004]|***|
|Net foreign assets; in percent|0.010||0.014||0.011||0.011||0.016||
|of GDP, four year average (NFA)|[0.006]||[0.007]|*|[0.007]||[0.006]|*|[0.008]|*|
|EU10 country dummy times|||-0.049||||||-0.056||
|NFA|||[0.033]||||||[0.035]||
|EU candidates country dummy|||||-0.047||||-0.042||
|times NFA|||||[0.021]|**|||[0.022]|*|
|EU neighborhood dummy|||||||0.101||0.110||
|times NFA|||||||[0.052]|*|[0.052]|**|
|Common intercept|24.235||25.116||24.306||21.700||24.996||
||[4.073]|***|[4.172]|***|[4.235]|***|[4.231]|***|[4.519]|***|
|Number of observations|579||579||579||579||579||
|Number of countries|88||88||88||88||88||
|Number of instruments|30||40||36||35||51||
|Hansen test for over-id. restrictions|0.010<sup>[B]</sup>||0.046<sup>[B]</sup>||0.021<sup>[B]</sup>||0.068<sup>[B]</sup>||0.324||
|Arellano-Bond AR(1) test (p-value)|0.000||0.000||0.000||0.000||0.000||
|Arellano-Bond AR(2)test(p-value)|0.968||0.962||0.970||0.975||0.981||

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.

The results are remarkably similar when _de facto_ or quantity-based measures of the international financial openness are used (Table 4, columns 5 to 8). In this case, a country’s international financial openness is defined as the sum of its gross stocks of foreign assets and liabilities (scaled by GDP) as measured by Lane and Milesi-Ferretti (2007); referred to as FINOPEN in the table. The results for most country groups are in line with the prevailing view in the literature: the role of international financial openness is indirect, with collateral benefits, such as the development of the domestic financial sector, the discipline on macroeconomic policies, and the promotion of specialization (e.g., Kose et al. 2009) being the reasons why foreign capital supports growth. An important exception is the group of EU candidates, since the impact is direct and positive: an increase of the _de facto_ international financial openness by 10 percent of GDP is associated with higher medium-term growth rate by 0.2 percentage points (Table 4, columns 6 and 8).

> 8 The legal perspective on the international financial integration mainly focuses on the capital account restrictions reported in the International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions.

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