Bombing Iran will exacerbate, not resolve problems, Michael McFaul, Larry Diamond and Abbas Milani demonstrate in a new landmark article. "Rather than throw the reactionaries in Tehran a political lifeline in the form of war, the United States should pursue a more subtle approach: contain Iranian agents in the region, but offer to negotiate unconditionally with Iran on all the outstanding issues. Comprehensive negotiations could offer powerful inducements, such as a lifting of the economic embargo and a significant influx of foreign investment and thus create the jobs necessary to persuade Iran to halt nuclear enrichment. If the hard-liners reject the offer, then they would have to contend with an angry Iranian public. Such internal strife would be far preferable to an Islamic Republic united against the attacking forces of the 'Great Satan.'"

Stock market liberalizations lead private investment booms. In a sample of 11 developing countries that liberalized, 9 experience growth rates of private investment above their non-liberalization median in the first year after liberalizing. In the second and third years after liberalization this number is 10 of 11 and 8 of 11 respectively. The mean growth rate of private investment in the three years immediately following stock market liberalization exceeds the sample mean by 22 percentage points. The evidence stands in sharp contrast with recent work that suggests capital account liberalization has no effect on investment.

Capital account liberalization was once seen as an inevitable step along the path to economic development for poor countries. Liberalizing the capital account, it was said, would permit financial resources to flow from capital-abundant countries, where expected returns were low, to capital-scarce countries, where expected returns were high. The flow of resources into the liberalizing countries would reduce their cost of capital, increase investment, and raise output (Fischer, 1998; Summers, 2000). The principal policy question was not whether to liberalize the capital account, but when - before or after undertaking macroeconomic reforms such as inflation stabilization and trade liberalization (McKinnon, 1991). Or so the story went.

In recent years intellectual opinion has moved against liberalization. Financial crises in Asia, Russia and Latin America have shifted the focus of the conversation from when countries should liberalize to if they should do so at all. Opponents of the process argue that capital account liberalization does not generate greater efficiency. Instead, liberalization invites speculative hot money flows and increases the likelihood of financial crises with no discernible positive effects on investment, output, or any other real variable with nontrivial welfare implications (Bhagwhati, 1998; Rodrik, 1998; Stiglitz 2002).

While opinions about capital account liberalization are abundant, facts are relatively scarce. This paper tries to increase the ratio of facts to opinions. In the late 1980s and early 1990s a number of developing countries liberalized their stock markets, opening them to foreign investors for the first time. These liberalizations constitute discrete changes in the degree of capital account openness, which allow for a positive empirical description of the cost of capital, investment, and growth during liberalization episodes.

When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms - a $42 billion increase in shareholder value. There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment and growth. Since the market capitalization of US commercial banks with developing-country loan exposure also rises - by $13 billion - the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.