Essays on Financial Liberalization and Financial Deepening Report

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The paper "Financial Liberalization and Financial Deepening" is a great example of a report on macro and microeconomics. Financial liberalization can be described as the procedure of enabling markets to establish who attains and grants credit and at what rate. Extensive financial liberalization comprises six major aspects: the removal of credit controls, the deregulation of interest rates, free admission into the banking zone, bank independence, personal ownership of banks, and the liberalization of worldwide fund flows. The major aim of financial liberalization is to create a more competent, and inherent financial system, able to sustain the development of private sector ventures. Interest cost decontrols lead to extreme real interest rates for savers and a rise in assets in the economic system which can serve as loans for investment ventures.

Financial liberalization brings an end to the custom of giving out low-cost credit to favored sectors. This enhances the allocation of capital in the economy, as resources are allocated to most profitable sectors. Financial liberalization means better access to international resources, made possible by an expanded role for overseas banks and non-bank financial institutions, could be the third benefit of financial liberalization (Stiglitz, 2000). McKinnon and Shaw found that low returns promoted investment, but not savings, generating a gap among preferred investment and domestic savings accessible to finance investment.

This gap influenced the rationing of credits, or dependence on overseas borrowing. They also found out that cheap capital promoted capital-intensive procedures of production. Cheap loan rationed to particular sectors of the economy resulted in an incompetent distribution of loans, instead of the market distribution of loans to greatest return investments. The result of economic liberalization has led to a rise in the private resources flow and changing the way in developing Nations secure foreign capital, especially during the 90s.

Foreign financial crises become common during this period, for instance, Mexico in 1995, Asia in 1997, and Argentina in 2001.The discussion on the influence of financial liberalization can be summarized into arguments surrounding current accounts and economic accounts. Opinions regarding the current accounts converge around its positive impacts on development and welfare.

References

1. De Gregorio, J., Guidotti. P. 1995. Financial development and economic growth. World Development23 (3): 433-448

2. Fry, M. 1981a. Interest rates in Asia: An examination of interest rate policies in Burma, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Sri-Lanka, Taiwan and Thailand. IMF, Washington, D.C. (June).

3. McKinnon, R. 1973. Money and capital in economic development. Washington, D.C.: The Brookings Institution.

4. Molho, L. 1986. Interest rate, savings and investment in developing countries: A re-examination of the McKinnon-Shaw hypothesis. IMF Staff Papers 33(1): 90-111.

5. Morisset, J. 1993. Does financial liberalisation really improve private investment in developing countries? Journal of Development Economics 40. (February): 133-150.

6. Mosley, P. 1999. Micro-macro linkages in financial markets: The impact of financial liberalisation on access to rural credit in four African countries. Finance and Development Research Program, Development Initiative, working paper No. 4.

7. Saint-Paul. 1992. Technological dualism, incomplete financial markets and economic development. Journal of International Trade and Economic Development1. (June): 13-26.

8.Shaw, E. S. 1973. Financial deepening in economic development. New York: Oxford University Press.

9. Stiglitz, J. (2000). Capital market liberalization, economic growth and instability. World Development. v.28, n.6.

10. Stiglitz, J. E., Weiss, A. 1981. Credit rationing in markets with imperfect information. American Economic Review 71(June): 393-410.

11. World Bank. 1987. World development report. New York: Oxford University Press.

12. Rodrik, D. (1998). Who needs capital-account convertibility? Cambridge: Harvard University. (unpublished)

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