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 (Stanley Fischer, 1998; Lawrence H. 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 (Ronald I. 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 (Jagdish Bhagwhati, 1998; Dani Rodrik, 1998; Joseph 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 1980's and early 1990's 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.

Figure 1 previews the central message that the rest of this paper develops in more detail. The cost of capital falls when developing countries liberalize the stock market. Since the cost of capital falls, investment should also increase, as profit-maximizing firms drive down the marginal product of capital to its new lower cost. Figure 2 is consistent with this prediction. Liberalization leads to a sharp increase in the growth rate of the capital stock. Finally, as a direct consequence of growth accounting, the increase in investment should generate a temporary increase in the growth rate of output per worker. Figure 3 confirms that the growth rate of output per worker rises in the aftermath of liberalization.

While the figures do no harm to the efficiency view of capital-account liberalization, a number of caveats are in order. For example, it is legitimate to interpret a fall in the dividend yield (Fig. 1) as a decline in the cost of capital, if there is no change in the expected future growth rate of dividends at the time of liberalization. But stock-market liberalizations are usually accompanied by other economic reforms that may increase the expected future growth rate of output and dividends (Henry, 2000a, b). Because liberalizations do not occur in isolation, it is important to think carefully about how to interpret the data. Neoclassical theory provides a good starting point for framing the issues.

When the bronze statue of Saddam Hussein crashed to the ground more than a week ago, the image joined a long series of unforgettable mental pictures marking the end of tyrannical rule. In much of the former colonial world, the retiring of a European flag followed by the hoisting of a new flag of independence captured the moment. And more recently, the chiseling of the Berlin Wall in 1989 and the crane uprooting secret-police founder Felix Dzerzhinsky's statue in Moscow in 1991 served as near-perfect metaphors for the collapse of the Soviet empire.

Those images provide the type of clarity that exists -- for a moment at least -- when a dictatorship falls. But it is probably no accident that there are no such lasting images of what comes next. The switching of a flag cannot capture the inevitable messiness of transitions from tyranny to some new political order, and the truth is that few such transitions have led quickly to more freedom -- or the democracy that the United States wishes for Iraq.

For supporters of democracy, there is nothing more exciting or memorable than the fall of another dictator. The construction of a new political system, however, is a much more ambiguous process. The French still commemorate the storming of the Bastille, but the consolidation of democracy afterward took decades. Russian democrats at one point celebrated August 1991 as the month Soviet communism collapsed, but they stopped having parties later in the decade, when democracy's arrival still seemed far away. Navigating the gap between the fall of the old order and the formation of the new order is always difficult; it's especially dangerous when extremist movements and ideologies are added to the mix.

Iraq has it all: ethnic and religious divides, foreign troops, and returning exiles and revolutionaries ready to step in with an alternative vision for how to organize Iraqi state and society when those who first take power fail. Although Germany, Japan and France in 1945, or Haiti and the Balkans in the 1990s, have become the analogous regime changes of choice for many Western analysts, we would do well to add France in 1789, Russia in 1917 and 1991, Iran in 1979 or Afghanistan in the early 1990s as other historical metaphors that may help us understand Iraq today. These revolutionary situations shared several characteristics after the fall of the old order.

First, the collapse of the old regime left a vacuum of state power. The anarchy, looting and interruption of state services that we see in Iraq are predictable consequences of regime change. Second, after the fall of the dictator, expectations about "life after the dictator" exploded. People who have been oppressed for decades want to benefit from the new order immediately. The urgent and angry questions last week from Ahmed Chalabi, the Iraqi National Congress leader now back in Iraq, about why the Americans have not provided more relief faster is typical. The first leaders after the departure of the king in France, the czar in Russia or the communists in Eastern Europe knew Chalabi's situation well. Paradoxically, society's expectations inflate at precisely the same moment when the state is least prepared to meet them. Third, the coalition that opposed the dictatorship dissolved. While the dictator was still in power, this united front embraced one ideology of opposition -- "anti-king," "anti-czar," "anti-shah" or "anti-communist." In doing so, these coalitions consisted of economic, political, ethnic and religious forces with radically different visions for their country after regime change. Unity ended after the dictator fell. In Russia, Bolsheviks and liberals in 1917 and nationalists and democrats in 1991 went their separate ways. In Iran in 1979, Islamic leftists, liberals and militant clerics celebrated their shared goal of removing the shah. Just a few years after the collapse of the old order, many of the coalition partners who brought down the shah were out of power or in jail. Soon after the Soviet puppet regime in Afghanistan fell, the anti-Soviet coalition forces were killing each other.

The Iraqi opposition today consists of exiled liberals and generals, Kurdish nationalists, Shiite and Sunni clerics, Islamic fundamentalists, a smattering of monarchists and the unknown local leaders throughout the country who have quietly provided comfort to opponents and passive resistance to Saddam Hussein's totalitarian regime. From other regime changes, we should assume that this united front against Hussein will no longer be united after Hussein. The combination of a weak state, soaring expectations in society and factional fighting in the anti-authoritarian coalition gives rise to two dangerous "solutions." One is restoration. Living in anarchy, people want order. Who can provide order most quickly? Those who previously provided order. How can order be provided most quickly? By deploying the same methods used before. For both American officials governing Iraq and the Iraqi people, the temptation to settle for a new regime led by new leaders with autocratic proclivities grafted onto old state structures from Hussein's regime will be great.

But there is another, more sinister solution that can also gain appeal: the victory of the extremists. The end of dictatorship is a euphoric but ephemeral moment. When the new, interim government does not meet popular expectations, the radicals offer up an alternative vision to construct a new political (and often social) order. It is amazing and frightening how often they win. In February 1917 the end of Russian czarism seemed to create propitious conditions for constitutional democracy. Less than a year later, the Bolsheviks had seized power. In 1979 the first provisional government in Iran contained many prominent leftist intellectuals and even some liberals. No one today, however, remembers Mehdi Bazargan or Abol Hassan Bani-Sadr, while everyone knows the name of Ayatollah Ruhollah Khomeini, the radical cleric who pushed these others aside to dictate his vision for Iran. The Taliban seized control in Afghanistan to end the years of anarchy after the collapse of the old order there.

In Iraq, this threat from revolutionaries -- that is, the terrorist wing of Islamic fundamentalism inspired by Osama bin Laden -- is now latent and below the radar screen, but real. For devotees of this world perspective, Iraq offers a ripe opportunity. Not only is the old state gone and expectations high, but the only authority in the country is, in their revolutionary discourse, an imperial occupying force of infidels. Vladimir Lenin and Khomeini would have drooled over such propitious conditions for revolution.

The third path between restoration and revolution is a long and bumpy one. Liberal, moderate grass-roots movements from below always take more time to emerge and consolidate than the autocratic forces of either restoration or revolution. To succeed in Iraq, they will need their U.S. allies for the long haul. Premature departure guarantees thugs in power at best and Osama bin Laden supporters at worst.

The writer is a Hoover fellow and professor of political science at Stanford University and a senior associate at the Carnegie Endowment for International Peace.

The idea of cooperation between the United States and Russia in the area of missile defense has been popular in Russia since at least the early 1990s. The degree of interest has varied over time, but it has been consistently strong for most of the last decade. Disagreement on missile defenses and the Anti-Ballistic Missile (ABM) Treaty, which has been plaguing the U.S.-Russian relationships, actually has helped strengthen the popularity of the idea of cooperation. Just recently, the possibility of U.S.-Russian cooperation in missile defense was mentioned at least twice, in Duma hearings and in comments made by President Vladimir Putin. In both cases it was underscored that despite reservations about U.S. policy on missile defense, Russia is interested in participating in a joint missile defense development effort.

This policy memo, number 316 in the PONARS Policy Memo Series, examines the possibility of cooperation in missile defense in the context of existing U.S.-Russian joint projects. The main result of this analysis is that, although some kind of a joint effort is certainly possible, the area of missile defense is probably one of the least favorable ones for cooperation, because Russia and the United States lack the institutional infrastructure that is necessary to handle any kind of joint missile defense technology program. In addition, the attempts to politicize the issue by presenting it as a sign of a nascent U.S.-Russian partnership will most likely make any successful cooperation impossible.

Command economies gave Communist-era elites administrative control and material privilege but severely restricted money income and private wealth. Markets and privatization inject new value into public assets and create unprecedented opportunities for elite insiders. These opportunities depend on the extent of regime change and barriers to asset appropriation. Regime change varies from the survival of the entire party hierarchy to its rapid collapse and defeat in competitive elections. Barriers to asset appropriation vary with the extent, pace, and form of privatization, and the concentration and liquidity of assets. Different combinations of such circumstances jointly affect the extent to which elites obtain ownership of control of privatized assets, use political office to extract larger incomes, move into salaried elite occupations, or fall out of the elite altogether. Regime change and barriers to asset appropriation affect change at the national level, but outcomes vary across economic sectors because of characteristics of organizations, elite positions, and assets. This elementary theory serves to integrate varied findings from recent research on Central Europe, China, and Russia, and yields predictions for other regions.