Motivated by debates about the financial liberalization and its benefit and cost and the conflicting theoretical predictions, this paper empirically tests for the net effect of financial liberalization on per capita GDP growth. Indeed, the crisis empirical literature present results consistent with the fact that financial liberalization eventually leads to output losses as it increases the propensity to financial crisis (Glick and Hutchinson 2001, Barro 2001, Baldacci et al., 2002). On the other hand, Bekaert et al. (2005), Henry (2000) find that financial liberalization enhances growth. Using data on 113 developing and emerging economies from 1980 to 2004 , this paper empirically estimates the net effect of financial liberalization on real per capita GDP growth. Because recent literature (Henry, 2007) has questioned results reported by previous empirical work, this paper uses three different empirical methodologies including the PMS (Propensity Matching Score), GMM (Generalized Method of Moments) and a Two-step Heckman estimation technics. These methodologies allow to resolve issues related to sample selection bias, country heterogeneity and endogeneity of regressors. Depending on the empirical methodology, control variables, and sub-periods, the net effect of financial liberalization ranges from -0.05% up to 1%. Furthermore from about 0.50%, the net effect drops to 0.05% after controlling for legal and institutional environment. The estimates also indicate a negative net effect of about 0.6% during 1990s the Asian crisis. These results tend to support the following: developing economies growth faster when they financially liberalize, but the increase in the propensity of crisis due to the liberalization, coupled with poor institutions wipes away most of the gains. The findings emphasize the importance of high-quality institutions in developing economies.

Keywords: International Financial Liberalization, Crisis, Institutions, Growth.

JEL classification: F 30,G 15,G 20.