Capital Account and Foreign Direct Investment Policies in the Late Nineties: What Effect on Trade?

The purpose of this paper is to empirically test the relationship between capital account policies and international trade in the late 1990s. A gravitational-based system is developed to identify and estimate this association for seventy-four countries and a subset of ASEAN countries. Using non-linear panel and cross-section techniques, a strong positive association is found, with foreign direct investment policies accounting for a significant portion of the total effect. The ASEAN sub-sample is found to be relatively more responsive to changes in capital account policies than the rest of the world, confirming the importance of financial liberalization in developing regions. However, this policy-trade association diminishes after the 1997-98 global contagion period for both ASEAN and world samples.