This article critically evaluates the argument that, if developing countries had better
institutions and policies and deeper financial markets, they would receive a boost to
growth from capital account liberalization. The existing empirical record is ambiguous
and leaves unanswered many of the important questions facing policy-makers. To test
some predictions driving the case for capital account liberalization in developing
countries, this article investigates the relationship between net capital inflows and
medium-term economic growth within a sample of rich, institutionally advanced
economies between 1984 and 2004. No evidence of a strong or statistically robust
relationship between net capital inflows and future economic growth is found. On the
contrary, the evidence suggests that net capital inflows are more strongly associated
with past economic growth than with future economic growth. This result implies that
capital account liberalization is not likely to boost growth, even among countries with
the most appropriate institutions and policies.