Discussion paper

DP17527 Capital Flows and Institutions

Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on ‘‘good’’ institutions grow relatively more after foreign capital flows into the private sector. The effects are stronger in countries further away from the institutional frontier, but they disappear and even turn negative in countries with very low institutional quality. Institution-dependent industries grow, however less when capital flows to the official sector. Our findings support the view that foreign investors can be, under certain conditions, a catalyst for institutional reform and that the relaxation of government budget constraints generally weakens structural reform incentives.


Igan, D, A Lauwers and D Puy (2022), ‘DP17527 Capital Flows and Institutions‘, CEPR Discussion Paper No. 17527. CEPR Press, Paris & London. https://cepr.org/publications/dp17527