The Economic and Social Effects of Financial Liberalization (original) (raw)
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The Impact of Financial Liberalization on the Stability of the Financial System in Emerging Markets
Mediterranean Journal of Social Sciences, 2015
Many of the reforms appeared and have touched the economic and financial sector, perhaps the most important is the financial liberalization policy that have emerged since the seventies, which aims to ease the degree of restrictions on the financial system in order to enhance the level of efficiency and reform entirely, by opening the financial and capital markets to foreign companies in the fields of banks and insurance and securities and investment firms and fund management and a large number of services. However, the financial liberalization hasty process and random may lead to violent crises and imbalances significant at the level of macro and micro economic, especially those relating to the stability of the financial system in emerging markets, and has become maintain the stability of the financial system at the local and international levels critical for countries in general a target, and the newly industrialized countries in the ways of growth in particular, and the aim of this study is to provide a conceptual theoretical framework of financial liberalization; identify the nature of the financial system and financial stability of emerging markets; and emphasize the importance of a balanced financial liberalization in maintaining the stability of the financial system in emerging financial markets.
Financial system mobilises savings and allocates loans as well as stimulating new investments that support economic growth, while the regulatory framework sets the rules and controls activities within the system, providing stability for investors. However, inflexible rules and regulations tend to slow down the economic progress, making a developing country less attractive for new investors, and closed to financial innovations. Developing countries with predominantly bank-oriented financial systems and lacking market depth are not attractive to new investors. Maintaining status quo in these conditions means further economic deterioration and reduced chances for success. Thus, it is essential that developing countries consider steps towards financial liberalization or deregulation, which will help open the borders for capital flows and attract new investments and ideas. Deregulating steps can involve changes to interest rates determination, restructuring of financial institutions, abolishment of direct loans allocation practices, promotion of prudential regulation, establishment of new banks/multi-facets financial institutions, etc. Deregulation affects all sectors of the economy, i.e. increased savings bring new investments, directly contributing to higher production and employment growth, spreading the tax burden to a larger group, and enabling further savings and investments. However, financial deregulation does not guaranty quick economic growth for developing countries because changing financial rules could motivate the domestic capital going abroad, increased volatility can create serious challenges for banks, while overly relaxed rules can make investors nervous. The key to success is in determining the appropriate balance between the level of financial liberalization and sufficiently flexible and effective regulatory framework that will support economic growth and maintain investor confidence. The main goal of this paper is to analyse and critique the process of financial liberalization in developing countries and to motivate the policy makers to consider available lessons when creating their balanced approach to financial liberalization and regulation processes towards financial development, openness, and integration in the global financial landscape. Keywords: financial liberalization, financial regulation, economic development, developing countries
Benefits and Costs of Financial Repression & Liberalisation in Developing Countries
Most evidence suggests that a policy of financial liberalization brings with it both benefits and costs to developing economies. It has been found that middle income countries have experienced rapid economic growth after liberalizing while in low income countries a similar effect has not been noticed. Many East Asian countries that have adopted financial liberalization have experienced a high economic growth period followed by a severe financial crisis. Many Latin American countries that have liberalized have had to contend with high inflation and currency collapses. In balance, whether the costs outweigh the benefits or vis-versa, appears to depend on the country undertaking the financial liberalization and the manner in which it is implemented.
Review of financial liberalisation policies in developing countries from 1986 to 2016
Risk Governance and Control: Financial Markets and Institutions, 2021
By the late 1980s, most sub-Saharan African (SSA) countries had undertaken policy reforms to abolish financial sector controls. While studies have produced several liberalization indices, available measures are limited in scope and time coverage. The purpose of this research is to address this limitation by constructing a new set of indicators that tracks the magnitude, pace, and timing of reform aspects in 26 countries between 1986 and 2016. The paper uses questions and coding rules from a framework developed by Detragiache, Abiad, and Tressel (2008) to collect and analyse data on seven liberalization policies: credit controls, interest rate controls, entry barriers, state ownership of banks, capital account restrictions, prudential regulation and supervision, and securities market policy. Results indicate that interest rate liberalization is the most advanced dimension, followed by the abolition of entry restrictions. The least advanced dimension is bank supervision and prudential...
Financial Liberalization, How Far, How Fast?
Journal of Comparative Economics, 2004
Comparative economists interested in financial development in the formerly centrally planned economies of the Soviet Union and Eastern Europe can learn much from an examination of the process of financial liberalization in developing countries. With an examination of four or five decades of institutional and policy changes around the globe, this volume brings a broad overview of empirical analyses to the theoretical debate about the management and development of financial systems. The volume is divided into three sections: Analytics, Cross Country Evidence and Liberalization Experience. The first section contains two excellent chapters that provide the conceptual and analytical background essential to understanding financial liberalization. In the first chapter, Gerard Caprio, James Hanson and Patrick Honohan examine financial repression, the case for liberalization, and arguments for restraint. The short-run consequences of liberalization are sometimes disastrous; exposure of weak portfolios within the financial system may bring about financial and exchange rate crises. The benefits of liberalization include more rational allocation of financial capital, improved corporate governance, increased efficiency, and the elimination of rents within the financial and banking system, and an overall increase in the supply of capital. Although these benefits certainly justify liberalization, caution and restraint may be appropriate in the transition process. The authors turn to liberalization in practice and provide an overview of the cases presented in the third section of the book. The second chapter, by Honohan and Joseph Stiglitz, argues that while previous repressed systems often had regulations designed with sectoral objectives rather than prudence in mind, which may have become technologically obsolete, and may have masked financial insolvency of the banking system, complete liberalization is not appropriate. Rather they make the economic case for a more robust approach to financial restraint, i.e. policies that provide policy makers with the ability to cope with events and behaviors that may lead to system failures. These policies should be clear and transparent so that violations are easy to detect and they should embody sanctions that can be easily enforced. Agency and information problems in developing countries argue for robust policies, whereas liberalization with reliance on sophisticated indirect models of control require information processing beyond the capacity of policy makers in most developing economies. Moreover, fair and even-handed regulatory capacities often do not exist and independence of policy makers, including the subtle judgments of the systemic risk managers is not typically found in practice. Robust policies and cautious financial restraint that recognizes and preserves franchise values seems more appropriate than a 0147-5967/2004 Published by Elsevier Inc. on behalf of Association for Comparative Economic Studies.
A Theory of Financial Liberalisation: Why are Developing Countries so Reluctant
2011
This study treats capital flows as risky growth opportunities for both investing and host countries in a standard mean-variance model. Differing optimal trade-offs between growth and volatility on both sides of capital flows are examined on the basis of their different attitudes towards destabilising risk, different considerations of capital market openness and different levels of financial sector development. It is established that growth and volatility may have a positive or negative relationship in theory, but in practice, they are correlated negatively with each other. This negative correlation is significantly non-linear after some normalisation and holds persistently not only for developing but also for developed countries. The study shows that one side’s push for financial liberalisation may come across the other side’s resistance to it. This conflict of interest can be resolved via negotiations for a compromise equilibrium at which both sides’ optimal trade-offs are made internationally compatible.
Is financial liberalization good for developing nations?
Review of Radical Political Economics, 2002
Korea’s state-led, bank-based, and closed financial system helped generate its impressive development record from 1961 until the 1997 crisis. However, an ill-conceived liberalization process in the early 1990s eventuated in an IMF takeover in late 1997. Post-crisis neoliberal restructuring, which moved Korea towards a globally open, capital market-based financial system, has thus far failed to generate a sustainable economic recovery. It threatens to significantly lower Korea’s long-term rate of capital accumulation. Korea would be well advised to reject neoliberalism, and adopt a modernized and radically democratized version of the traditional model, incorporating a state-led bank-based financial system with capital controls.