Financial Liberalization, Economic Growth, Stability and Financial Market Development in Emerging Markets Pietro Masci, Department of the Treasury, Rome Introduction This paper provides stylized facts with respect to the relationships among financial liberalization, economic growth, stability, and financial market development, with a focus on emerging countries and particularly on Latin America and Caribbean countries in the context of the increasing use of the domestic currency in emerging markets and the issue of access to finance. Since the crisis of the late s and early s, many emerging market countries have directed greater attention and support toward developing domestic financial markets with long-term view and also to permit access to finance to various segments of the population as well as to entrepreneurs in the Schumpeterian sense . This stance is mainly centered on better prudential regulation and professional management of government debt and bonds. It is different from the past, when emerging market economies relied on financial liberalization to access foreign rather than domestic markets for selected entities including the government, state —owned enterprises and big corporations.
Potential benefits[ edit ] The service sector is probably the most liberalized of the sectors.
Liberalization offers the opportunity for the sector to compete internationally, contributing to GDP growth and generating foreign exchange. Furthermore, if service providers in some developing economies are not competitive enough to succeed on world markets, overseas companies will be attracted to invest, bringing with them international best practices and better skills and technologies.
Some argue foreign providers crowd out domestic providers and instead of leading to investment and the transfer of skills, it allows foreign providers and shareholders "to capture the profits for themselves, taking the money out of the country".
Other potential risks resulting from liberalisation, include: Risks of financial sector instability resulting from global contagion  Risk of environmental degradation  Risk of a debt spiral due to decreased tax revenue among other economic problems oftentimes linked to IMF restructuring though the state government in Kansas is currently encountering this issue.
For example, according to the anthropologist Lilu Abu-Lughod we see increased gender inequality in new markets as women lose labor opportunities that existed prior to market liberalization.
However, researchers at thinks tanks such as the Overseas Development Institute argue the risks are outweighed by the benefits and that what is needed is careful regulation. Yet such concerns could be addressed through regulation and by a universal service obligations in contracts, or in the licensing, to prevent such a situation from occurring.
Of course, this bears the risk that this barrier to entry will dissuade international competitors from entering the market see Deregulation.1. Introduction. Financial liberalization is an important catalyst for economic growth (Stiglitz, ).At the domestic front, financial liberalization affects growth through the following channels: it reduces quantitative controls, allows interest rates to be market determined; produces higher interest rates and allocates capital toward higher return projects.
This volume addresses one of the most topical and controversial issues in banking and financial policy. It explains why governments have felt the need to liberalize banking and finance, for example, by privatizing banks and allowing interest rates to be set by the pfmlures.com: Gerard Caprio.
In the model, financial liberalization might lead to different outcomes: (i) domestic capital flight and ambiguous effects on net capital flows, investment, and growth; (ii) large capital inflows and higher investment and growth; or (iii) volatile capital flows and unstable domestic financial markets.
Financial liberalization has also been cited as a possible culprit in the Asian financial crisis by Corsetti et al. () and Furman and Stiglitz (). In explaining this link, the existing literature has focussed on the institutional structure of newly liberalized banking systems.
The present paper asks whether financial liberalization is hazardous.2 It studies the experience with liberalization in a sample of 27 developing and developed economy, attempting to detect whether exchange rate instability, possibility culminating into.
Rethinking the Effects of Financial Liberalization Fernando A. Broner, Jaume Ventura.
NBER Working Paper No. Issued in December NBER Program(s):Economic Fluctuations and Growth During the last few decades, many emerging markets have lifted .