the case in EU neighborhood countries, possibly on account of positive terms of trade shocks and remittances flows experienced by these countries, or the lagged progress with economic stabilization in these countries; in fact, for a variety of reasons, these countries seem to have experienced a lagged transition from plan to market and their progress towards EU membership is also more uncertain.

**Table 2. Foreign Capital and** **<u>Growth—A Flow Perspective (Foreign Savings)</u>**

|_Growth regressions_<br>||Dependent<br>o<br>|variable is four-year a<br>f real GDPper capita(<br>|verage gro<br>PPP)<br>|wth<br>|
|---|---|---|---|---|---|
|_Explanatory variable_|[1]|[2]|[3]|[4]|[5]|
|Log of initial GDP per capita<sup>[A]</sup>|-2.364|-2.327|-2.426|-2.322|-2.303|
||[0.440]|***<br>[0.434]|***<br>[0.450] ***|[0.424]|***<br>[0.425] ***|
|Educational attainment of population above 25|0.489|0.470|0.500|0.493|0.479|
||[0.121]|***<br>[0.119]|***<br>[0.124] ***|[0.112]|***<br>[0.114] ***|
|Population growth|-0.352|-0.351|-0.346|-0.342|-0.339|
||[0.162]|**<br>[0.156]|**<br>[0.162] **|[0.149]|**<br>[0.141] **|
|Relative price of investment|0.031|0.024|0.037|-0.047|0.001|
||[0.501]|[0.491]|[0.498]|[0.583]|[0.561]|
|Trade openness (in percent of GDP)|0.011|0.011|0.011|0.011|0.011|
||[0.003]|***<br>[0.003]|***<br>[0.003] ***|[0.003]|***<br>[0.003] ***|
|Current account balance; in percent of GDP,|0.044|0.055|0.053|0.032|0.044|
|four year average (CAB)|[0.040]|[0.040]|[0.046]|[0.042]|[0.053]|
|EU-10 country dummy times CAB||-0.262|||-0.245|
|||[0.094]|***||[0.101] **|
|EU candidates country dummy times CAB|||-0.133||-0.124|
||||[0.055] **||[0.062] **|
|EU neighborhood country dummy times CAB||||0.476|0.485|
|||||[0.127]|***<br>[0.135] ***|
|Common intercept|20.640|20.456|21.139|20.272|20.159|
||[3.654]|***<br>[3.608]|***<br>[3.731] ***|[3.648]|***<br>[3.627] ***|
|Number of observations|584|584|584|584|584|
|Number of countries|88|88|88|88|88|
|Number of instruments|30|35|35|35|45|
|Hansen test for over-identifying restrictions|0.064<sup>[B]</sup>|0.153|0.059<sup>[B]</sup>|0.164|0.204|
|Arellano-Bond AR(1) test (p-value)|0.000|0.000|0.000|0.000|0.000|
|Arellano-Bond AR(2)test(p-value)|0.812|0.790|0.847|0.749|0.769|

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 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.

Although the stock approach to global imbalances has mostly been applied when explaining the international adjustment mechanism (e.g., Milesi-Ferretti and Razin, 1998 and 2000), recent empirical studies have also listed the net foreign assets as a determinant of economic growth (e.g., Prasad et al., 2007; and Abiad et al., 2009). On theoretical grounds, the impact of cross-border holdings of assets and liabilities on economic growth is ambiguous due to the variety of channels at work. An improvement of the NFA position reduces the aggregate capital domiciled in the home economy. Hence, an improvement in the NFA position could be negatively correlated with economic growth. On the other hand, larger cross-border holdings of foreign assets improve the NFA position and increase the net inflow of factor incomes in the creditor economy. As Prasad et al. (2007) conclude, this implies that the countries that have accumulated more assets are expected to grow faster. But are emerging European countries also different? Assessing the evidence requires an empirical resolution.

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