The scope and limits of financial liberalisation in developing countries: A critical survey

This article reviews the growing literature on financial reform in developing countries. We draw both on the theoretical contributions outlining the case for and against liberalisation as well as on the experience of many developing countries with liberalisation. We argue that the existence of market failures in financial markets hampers the liberalisation process and indeed suggests that the simple liberalising strategy envisaged in much of the literature is inappropriate. We argue instead for an alternative strategy which integrates some aspects of liberalisation with the development of appropriate financial institutions designed to serve best the needs of the real economy.     

Interest Rates and Investment in East Asia: An Empirical Evaluation of Various Financial Liberalisation Hypotheses

The article attempts to shed light on the appropriate interest rate policy in the process of economic development. To this end, we examine whether higher interest rates lead to higher investment (and growth) in four East Asian countries. We find that the investment rate went up with real interest rates up to 9 per cent in all four countries but started declining at still higher interest rates in two of the countries. Further, a banking crisis occurred in each of the three countries for which the real interest rates exceeded 9 per cent. This evidence rejects the ‘neo-structuralist’ argument. Nor does it support unbridled financial liberalisation. Yet, it provides only limited support to Stiglitz's case for ‘mild financial repression (real interest rates near zero)’ since reducing real interest rates from say, 6 to 3 or 0 per cent would have reduced investment. The optimum policy seems to be closest to McKinnon's ‘restrained financial liberalisation’ policy, that is, liberalisation with a moderate upper limit (about 6 or 7 per cent) on the real interest rates.     

Dynamics of Indonesian democratisation

Financial sector liberalisation has led to market failure on a massive scale. In industrial countries market failure led to the Great Financial Crisis that erupted in 2007 and continues into its fifth year. In developing countries liberalised financial markets have failed to provide access to financial services for the vast majority of households and firms. Small and medium-sized enterprises (smes), which are critical for employment, income creation and economic development, are particularly excluded by liberalised private financial markets. Market failure necessitates government intervention. To enhance smes' financial access requires an activist role by governments—not only by ensuring an enabling policy framework and financial infrastructure for smes, but also by supporting direct provision of financial services through national development banks and directed credit programmes. More broadly the crisis also provides an opening for a neo-structuralist development paradigm to replace the failed Washington Consensus. In this context activist financial sector policies should be integrated with industrial sector strategies.     

Financial market liberalisation in LDCs: The incidence of risk allocation effects of interest rate increases

’High’ deposit interest rates are central to the financial liberalisation argument. The article investigates the relatively neglected issue of who must pay. Two issues are stressed. If loan charges increase the incidence falls on (typically), highly geared businesses and overall financial saving may not rise as claimed. Second, although loan charges need not increase (and enhanced credit availability may compensate borrowers if they do), the financial risks of banks increase. These risks are pertinent to monetary policy and may force actions contrary to the liberalisation approach. Institutional developments to foster the supply of risk‐bearing capital are emphasised in conclusion.     

No miracles here: Trade policy,fiscal policy and economic growth

In this paper we consider whether the rate of growth following trade liberalisation differs significantly from growth in other developing countries. We find that it does not. Given this result we explore whether these growth effects are offset by changes in other policy variables, namely changes in fiscal policy. Governments increase welfare spending as a response to greater exposure to international trade. We find evidence that countries that liberalise their trade regimes increase their spending on welfare but not other forms of expenditure. However, once we control for the effects of fiscal policy, trade liberalisation still has no growth effects.     

Neoliberal globalisation,the nation-state and financial crises in the semi-periphery: A comparative analysis

The process of neoliberal globalisation has been associated with successive financial crises in the context of the 1990s, raising serious doubts concerning the sustainability of rapid growth in an environment of uncontrolled movements of short-term capital. The article probes into the origins of the financial crises in the semi-periphery through a structured comparison of three key recent crises in the world economy, namely the Mexican and Turkish crises of 1994 and the Asian crises of 1997. Whilst the magnitude of the capital flows and the dimensions of the subsequent crises are strikingly different, there are nonetheless important elements common to all three cases studied. One such common element involves the overdependence of the countries concerned on the short-term financial flows, in a setting characterised by premature capital account liberalisation in the absence of adequate regulation. It is striking that, contrary to the conventional IMF wisdom, financial crises have occurred in spite of 'sound fundamental', namely fiscal equilibrium and low inflation. The recent financial crises highlights a paradoxical situation: the need for effective regulation at a time when the capacity of the nation state to undertake the type of regulation needed severely circumscribed. Hence, the establishment of an effective regulatory framework at the global level emerges as a major requirement if successive financial crises, with significant economic and social cost, are to be avoided in the future.     

Political Violence and Excess Liquidity in Egypt

In this article we estimate a time-series model of excess liquidity in the Egyptian banking sector. While financial liberalisation and financial stability are found to have reduced excess liquidity, these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical Islamic groups and the Egyptian state. The link between political events and financial outcomes provides a rationale for economic policy interventions by the international community in response to increases in political instability.     

Economic orthodoxy and the East Asian crisis

It is increasingly apparent that the Asian economic crisis has also led to a serious ideological crisis in the West. Before the collapse there was broad agreement among Western orthodox economists that developing countries should pursue a set of economic policies, often referred to as the 'Washington consensus', which included financial sector liberalisation, privatisation of state-owned enterprises, fiscal discipline and trade, exchange rate and foreign investment deregulation. Since the collapse, however, this consensus has broken down. This paper examines the emergence of the new so-called post-Washington consensus, with its emphasis on governance and social capital. The lexicon of the new policy paradigm underlying this new consensus includes civil society, safety nets, and, especially, governance, to be added to the conventional Washington terminology of open markets, deregulation, liberalisation and structural adjustment. Our central thesis is that this new post-Washington consensus is an attempt to place more emphasis on the political and institutional foundations for programmes of structural reform. However, it is also a kind of politics of antipolitics that attempts to insulate economic institutions from the process of political bargaining.     

Interest rates,saving, investment and growth in mexico 1960–90: Tests of the financial liberalisation hypothesis

The theory of financial liberalisation argues that rising real interest rates induces more saving and investment and therefore acts as a positive stimulus to economic growth. This hypothesis is tested for Mexico over the period 1960–90, making the important distinction between financial saving and total saving. Financial saving is found to be positively related to real interest rates partly through capital flows and partly through domestic asset substitution, but total saving is invariant with respect to real interest rates. Investment is positively related to the supply of credit from the banking system, but the net effect of interest rates on investment is negative. Furthermore, taking McKinnon's ‘virtuous circle’ model of economic growth shows no favourable effects of interest rates on economic growth. It is concluded that any favourable effect of financial liberalisation and higher real interest rates on economic growth must come through raising the productivity of investment.     

Varieties and crises of neoliberal globalisation: Argentina,Turkey and the imf

Argentina and Turkey are two important ‘emerging market countries’ that experienced a major economic crisis during the same year. Focusing on the period leading up to the respective 2001 crises in the two countries, this article attempts to place the two experiments in historical perspective and provide an understanding of the common elements as well as the diversity of the neoliberal restructuring process in semi-peripheral settings. The article also attempts to identify some of the key mistakes made by the imf, which was, in part, responsible for the crises experienced. A central conclusion is that ‘new’ or unconsolidated democracies find themselves particularly vulnerable when they are suddenly and prematurely exposed to financial and capital account liberalisation. The outcome is a highly fragile, debt-led growth path with costly consequences. Indeed, although both countries have managed to accomplish impressive recoveries in the post-crisis period, given their past trajectories and the heavy debt burden that they face, it is too early to say that the recovery process will be translated into sustained and crisis-free growth. The regional environment in which the two countries find themselves might be particularly important in this context, with the powerful EU anchor a possible important advantage in the Turkish context.     

wto Agriculture negotiations: implications for the Global South

The Doha ‘Development’ Round of trade negotiations at the wto has featured agricultural trade liberalisation as one of its key aims. But developing countries were frustrated with both the process and the content of the agricultural agreement negotiations early on in the round. This prompted these countries, through a number of developing country groupings such as the G-20 and others, to call for changes in the talks to ensure that developing country voices and concerns were heard. Although developing countries were in many ways successful in registering their concerns in the latter half of the negotiations, and have maintained a fairly high degree of cohesion across the Global South, it remains unclear whether this cohesion will last as the uneven impacts of agricultural trade liberalisation become apparent.     

Globalisation,extremism and violence in poor countries

Globalisation—understood as external and internal market liberalisation—generates conditions in poor countries that are conducive to the emergence of extremist movements, instability and conflict. Liberalisation and the accompanying requirement of macroeconomic stabilisation subject people to rapid and sometimes devastating changes in fortune. Yet globalisation has had vastly different effects in different countries. Many have succumbed to sporadic growth or stagnation, inequality and turmoil, whereas others have achieved a broadly based prosperity, peace and democracy. A comparison of two liberalising African cases—Egypt and Mauritius—is employed to explain this divergence in paths. Mauritius has so far deftly navigated the maelstrom of globalisation by achieving growth with considerable equity and genuine democracy, while Egypt has followed a path of belated and partial liberalisation, irregular growth, the rise of new inequalities and insecurities, repression and violent Islamist movements. The major reason for this divergence lies in certain contingent institutional and class processes.     

Trade liberalisation in Brazil: Creating or exporting jobs?

Using the growth accounting and factor content approaches, this article looks at the impact of trade liberalisation on the structure and level of employment in Brazil over the 1990–97 period. The results support the argument that trade liberalisation in developing countries have a negative short‐term impact on employment — relatively small in Brazil's case ‐ which tends to be outweighed, in the long run, by a more labour‐intensive output mix.     

Debt,adjustment and the politics of effective response to HIV/AIDS in Africa

Today in much of Africa economic growth has slowed and living standards for the majority have suffered in the face of rising unemployment and mass poverty, resulting in incomes that are presently below the 1970 level. One problem that has been the focus of much attention and contention over the past 20 years is the huge foreign debt owed by African countries to bilateral donors and multilateral institutions. Debt servicing is consuming a disproportionate amount of scarce resources at the expense of the provision of basic services to the poor. In order to receive help in servicing their debts, countries must agree to implement structural economic reforms. This often entails drastic cuts in social expenditures, the privatisation of basic services, and the liberalisation of domestic trade consistent with WTO rules. These policy decisions have had a direct impact on the capacity of African countries to promote, fulfill and protect the right to health of their citizens. This is further compounded by ill-conceived privatisation of basic services such as water and health services, without any regard for the ability of the poor to access these essential services at a cost they can afford. Finally, adherence to WTO trade rules, which often comes as an extension of liberalisation policy, hampers the capacity of African governments to produce or purchase less expensive generic drugs for their citizen without fear of retaliation from the developed countries.     

The logic of interdisciplinary studies

In this article, I argue that emerging economies are systematically becoming more susceptible to both currency and banking crises after financial liberalisation (FL). Using data for 27 emerging economies from 1973 to 1998, univariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL. In particular, liberalisation allows more liquidity to enter an emerging economy, which finds its way into productive and speculative projects. What is common to both types of crises is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely. The chance of a crisis occurring in response to changes in short-term loans is greater after FL than before. Similarly, the chance of a currency crisis occurring following a currency overvaluation is larger after FL than before. In comparison, the likelihood of a banking crisis occurring in response to an overvalued currency remains the same. Finally, the results show that the chance of a currency crisis declines over time, while the chance of a banking crisis increases after FL.     

Are Tax Havens Good Neighbours? FDI Spillovers and Developing Countries

Abstract

This paper investigates the impact of tax havens on non-tax haven countries in terms of foreign direct investment (FDI). We analyze the importance of agglomeration effects by including FDI inflow levels in tax havens and capture geographic spillovers by measuring proximity to the nearest tax haven. Our analysis yields several interesting findings. First, using panel data for 142 countries, we find evidence of positive spillovers from tax havens to nearby developing countries, but not to nearby developed countries. Second, restricting our panel to developing countries, we find the positive effect of tax haven FDI on developing countries to be robust. Third, we find that geographic distance matters for financial flows: developing countries which are the closest to a nearby tax haven benefit the most in terms of FDI inflows. This result is robust to accounting for spatial interdependence of FDI.     

Bad banking in Thailand? An empirical analysis of macro indicators

It appears to be common wisdom that the basic cause of Thailand's crisis is its extraordinarily weak financial institutions. The article questions this proposition from an empirical viewpoint. It is well established that the long‐term performance of Thailand's financial system is favourable. The insight from moral hazard indicators is unexpected regarding the bad banking proposition, although not compelling. Finally, the liberalisation process produced inadequately addressed risks. However, this also applies to experienced and well‐regulated foreign banks. It is argued that the facts provided can be better explained in a framework of system change than by bad banking in Thailand.     

The G‐20 Must Get Serious About Its Commitments

The sovereign debt problem in Europe, ignited by Greece, has morphed into an economic crisis challenging the solvency of major banks and countries as well as a generalized crisis of governance. Lacking the legitimacy of public support, the leaders of the European Union's fledgling institutions have been indecisive and unable to contain the looming danger of financial contagion. Along with the economic slowdown in the United States, instability and volatility in Europe threaten to derail the fragile global recovery. In this section, several former European leaders as well as political figures from the emerging economies offer their ideas on how to fix Europe and stem the global threat.     

How to Save Europe

The sovereign debt problem in Europe, ignited by Greece, has morphed into an economic crisis challenging the solvency of major banks and countries as well as a generalized crisis of governance. Lacking the legitimacy of public support, the leaders of the European Union's fledgling institutions have been indecisive and unable to contain the looming danger of financial contagion. Along with the economic slowdown in the United States, instability and volatility in Europe threaten to derail the fragile global recovery. In this section, several former European leaders as well as political figures from the emerging economies offer their ideas on how to fix Europe and stem the global threat.     

A Robust Vision of Europe

The sovereign debt problem in Europe, ignited by Greece, has morphed into an economic crisis challenging the solvency of major banks and countries as well as a generalized crisis of governance. Lacking the legitimacy of public support, the leaders of the European Union's fledgling institutions have been indecisive and unable to contain the looming danger of financial contagion. Along with the economic slowdown in the United States, instability and volatility in Europe threaten to derail the fragile global recovery. In this section, several former European leaders as well as political figures from the emerging economies offer their ideas on how to fix Europe and stem the global threat.