Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyse several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the European Union. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.

DISCLAIMER: Policy Research Notes represent the views of the authors and do not necessarily represent WBG views or policy. The views expressed herein should be attributed to the authors and not to the WBG, its Board of Executive Directors, or its management.

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Market Reallocation and Knowledge Spillover:

Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries ’ portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries. This paper is a product of the Macroeconomics and Growth Team, Development Research Group; and the Office of the Chief Economist, Latin America and the Caribbean Region.. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions The authors may be contacted at

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

We investigate, both theoretically and empirically, how the negative e¤ects of government corruption on the economic growth of a country are magni…ed or reduced by capital account liberalization. Our model shows that highly corrupt countries impose higher tax rates than do less corrupt countries, thereby magnifying the negative impacts of government corruption on economic growth in highly corrupt countries and reducing the impacts in less corrupt countries if capital account liberalization is enacted. Empirical evidence obtained from an analysis of panel data collected from 109 countries is consistent with our theoretical predictions. Our theoretical and empirical results contribute to the recent policy debates on the merits and demerits of capital account liberalization. JEL classi…cation: O40; O43; F43; E62.

Quantifying the gains from multinational production has been a vital topic of economic research. Positive productivity gains are often attributed to knowledge spillover from multinational to domestic …rms. An alternative, less emphasized explanation is market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic …rms. We develop a model that incorporates both as-pects and quantify their relative importance in the gains from multinational production by exploring their distinct predictions for domestic distributions of productivity and revenue. We show that knowledge spillover shifts both distributions rightward while market reallocation raises the left truncation of the distributions and shifts revenue leftward. Using a rich …rm-level panel dataset that spans 60 countries, we …nd that both market reallocation and knowledge spillover are signi…cant sources of productivity gain. Ignoring the role of market reallocation can lead to signi…cant bias in understanding the nature of gains from multinational production.

seminars for insightful comments and suggestions. Funding from the World Bank Structural Transformation and Economic Growth project is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.