Decision, Vol. 36, No.1, April, 2009 article 1 final proof Introduction The traditional debate of fixed versus flexible exchange rate systems continues to be as relevant in the present context as it was at the time of the collapse of the Bretton Woods System. The adoption of a flexible exchange rate system has given rise to a concurrent global debate on the pace and sequencing of liberalization of the current versus capital account of the balance of payments. Large parts of the industrial world adopted capital account convertibility in the 1970s and 1980s, building on a process of international economic integration that was already well advanced in the area of trade in goods and services. This trend was facilitated by the Code for Liberalization of Capital Movements of the Organisation for Economic Cooperation and Development (OECD),which was introduced in a limited way in 1961 and later extended in stages to include the full range of capital account transactions in 1989. The adoption in 1988 by the European Union (EU) of the Second Directive on Liberalization of Capital Movements was also instrumental in further facilitating this trend. With the emergence of the McKinnon (1973) and Shaw (1973) hypothesis, the last decade saw large parts of the developing world with increasingly liberalized capital accounts as part of a general move towards greater openness and integration. They asserted that financial repression allocates capital to inefficient use and therefore it traps developing countries in a low saving and low growth cycle. Outward-oriented trade, realistic exchange rates and financial liberalization were likely to ensure more successful adjustments to external imbalances and higher rates of economic growth in the developing world. Capital Account Convertibility and Growth: A Developing Country Perspective A.K. Seth Sumati Varma A.K. Seth is Professor, Department of Commerce, Delhi School of Economics, University of Delhi, New Delhi, Email: akseth2020@yahoo.com. Sumati Varma is Reader, Sri Aurobindo College, University of Delhi, New Delhi, Email: varmasumati@yahoo.co.in. This paper investigates the link between capital account liberalization and growth for a cross – section of seventeen developing countries, including India, both theoretically and empirically. It also explores the different measures of capital account openness and the empirical evidence on the association between financial openness and growth. Theoretically, capital account openness leads to growth through two main channels: increase in aggregate investment and an improvement in productivity and efficiency. Existing empirical evidence however suggests that the link between capital account openness and economic growth is weak. The paper uses a de jure measure of capital account convertibility, calculated as the proportion of capital flows to total flow of funds. The results find a positive association between financial openness and growth. However growth is associated with an increase in the efficiency of inputs rather than due to an increase in investment per se. JEL Classification Numbers: F21, F36, F43 Keywords: capital flows, capital account liberalization, growth page 55 Reserch Papers