This paper is motivated by a set of cross-country observations on economic growth, structural

transformation, and investment rates in a large sample of countries, We observe a humpshaped

relationship between a country's investment rate and its level of development, both

within countries over time and across countries. Advanced economies reach their investment

peak at a higher level of income and at an earlier point in time relative to emerging markets.

We also observe the familiar patterns of structural change (a decline in the agricultural share

and an increase in the services share, both relative to manufacturing). The pace of change

observed in the 1930 to 1980 period in advanced economies is remarkably similar to that in

emerging markets since 1960. Motivated by these facts, we develop a two-region model of

the world economy that captures the dynamics of investment and structural change. The

regions are isolated from each other up to the point of capital market liberalization in the

early 1990s. At that point, capital 

ows from advanced economies to emerging markets and

accelerates the process of structural change in emerging markets. Both regions gain from

the liberalization of nancial markets, but the majority of the gains accrue to the emerging

economies. The overall magnitude of gains depends on the date of liberalization, the relative

sizes of the two regions and the degree of asymmetry between the two regions at the point

of liberalization. Finally, we consider the impact of a \second wave" of liberalization when

China fully opens its economy to capital in

ows.