Foreign Capital and Economic Growth in the First Era of Globalization

We explore the association between income and international capital flows between 1880 and 1913. Capital inflows are associated with higher incomes per capita in the long-run, but capital flows also brought income volatility via financial crises. Crises also decreased growth rates of income per capita significantly below trend for at least two years leading to important short term output losses. Countries just barely made up for these losses over time, so that there is no conditional long-run income loss or gain for countries that experienced crises. This is in contrast to the recent wave of globalization when capital importing countries that experienced a crisis seemed to grow relatively faster over fixed periods of time. We discuss some possibilities that can explain this finding.