<p>International macroeconomics is filled with puzzles—discrepancies between predictions from standard models and macroeconomic stylized facts. One such puzzle is the elusive effect of capital account liberalization (CAL) on economic growth. Standard economic theory predicts that capital account openness will spur growth in developing and industrialized countries, but empirical research shows little evidence. I take the neoclassical growth theory seriously, focusing on CAL’s growth effect through the channel of physical capital accumulation, which depends on the initial degree of capital scarcity. Using a granular dataset of capital controls and a novel instrumental-variable strategy, I provide evidence that capital scarcity matters decisively for the growth effect of CAL. The higher growth of CAL holds only when the host country has higher degree of capital scarcity. This main finding helps reconcile several mixed and often inconclusive previous evidence.</p>