Assessing the impact of financial liberalisation on stock market volatility in selected developing countries

This article argues for the importance of measuring stock market volatility following financial liberalisation in developing countries. Three alternative indices for measuring volatility are developed; these are used to examine the view that financial liberalisation induces increased asset price volatility. Based on the limited data available, this view is corroborated in the majority of countries investigated.     

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.     

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.     

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.     

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.     

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.     

Financial Inclusion and Human Capital in Developing Asia: the Australian connection

The Australian government as part of its aid programme allocates large funds to improve financial inclusion in developing countries. However, this does not take into account low educational levels in these countries. The existing literature on financial inclusion also treats the issue as mainly supply-centric and does not take cognisance of the fact that poor human development and high illiteracy levels in developing economies may prevent a large section of the population from benefitting from financial inclusion efforts, because of low awareness and comprehension of the financial services available. This study uses a detailed three-stage methodological approach to examine the relationship between financial development and human capital in 21 countries of developing Asia. The results show that a significant negative relationship exists between financial development proxied by M2/gdp and pupil:teacher ratios and a strong positive relationship exists between physical access to banks and expected years of schooling. Further, our financial development and educational development indices also show no clear pattern in the selected countries' financial and educational development.     

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.     

Exporting,Technical Efficiency and Product Quality: An Empirical Analysis of the Agricultural Sector in the Mediterranean Countries

This paper investigates the association between exporting and agricultural performance in terms of production efficiency and product quality. We test for the learning-by-exporting and self selection effects in a panel of advanced and developing Mediterranean countries involved in global market liberalisation. Product quality measures are inferred from trade data using a discrete choice demand model, and technical efficiency scores are appraised using a stochastic production frontier approach. Based on joint estimation of the performance equations and a dynamic export probit decision, the empirical results lend strong support to the self-selection hypothesis. Exporting appears to help quality upgrading that encourages more efficient use of resources.     

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.     

The Politics of Finance: How Capital Sways African Central Banks

While there is a large literature on the politics of central banking its insights are difficult to translate to sub-Saharan Africa. This article addresses gaps in this literature by considering how the interests of those who control financial resources sway African central banks. Case studies of Kenya, Nigeria and Uganda demonstrate that variation in the sources of capital on which countries rely to finance investment helps to account for the pattern of variation in central bank policy stances. The analysis further develops and probes arguments about power derived from the control of capital in the context of developing countries.     

Financial Factors and Manufacturing Exports: Firm-Level Evidence From Egypt

This paper focuses on the effects of financial factors on manufacturing firms’ export participation in a panel of Egyptian manufacturing firms over the 2003–2008 period. Our main results show that financial constraints reduce export participation of Egyptian firms, while financial liquidity improves it. Moreover, financial constraints have a negative impact on alternative measures of export activity, namely, export intensity and the time the firm takes before starting to export. Consequently, adding to the scarce literature on developing countries, our results support an important impact of financial factors on Egyptian firms’ participation in international trade.     

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.     

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.     

Crises,What Crises? New Evidence on the Relative Roles of Political and Economic Crises in Begetting Reforms

Crises beget reforms is a powerful hypothesis. But which type of crises – economic or political – are the main drivers of structural reforms? To answer this question, we construct measures of labour market and trade liberalisation and the two types of crises for a panel of about 100 developed and developing countries between 1960 and 2000. We find that political crises are more important determinants of structural reforms than economic crises. This finding is robust to the inclusion of interdependencies between crises, feedbacks between reforms, different estimators and various alternative measures of crises.     

Growth and Distress in a South Indian Peasant Economy During the Era of Economic Liberalisation

This article analyses the impact of agricultural liberalisation on different farming classes in the region of Telangana in South India. The region has been witnessing significant growth in real agricultural output over the last 15 years. At the same time, as NSS (National Sample Survey) household survey data indicate, there have been significant welfare declines not only for marginal farmers and landless labour, but for other groups as well. There have also been more than a thousand farmer suicides between 1998 and 2002. I argue in this article that during the liberalisation period, that is, post 1990, agricultural growth and increased distress have become mutually intertwined. I use the terms, growth-inducing distress and distress-inducing growth to explain this apparent paradox.     

Openness and Growth: Re-Examining Foreign Direct Investment,Trade and Output Linkages in Latin America

The openness–growth connection is still an open question in the empirical literature. Although some studies have found that openness has a positive impact on economic performance, others have seriously questioned the significance of this result. The main point that we try to emphasise in this paper is that openness involves more than just trade liberalisation. The increasing importance of international capital flows and especially foreign direct investment (FDI) seems to be another relevant component of outward oriented policies. Therefore, by using quarterly data from the late seventies to 2000, we investigate the effects of liberalisation in Mexico, Brazil and Argentina by taking into account trade and FDI growth links. The results suggest that it is important to consider both exports and FDI to ascertain the benefits associated to the outward oriented strategies followed by these countries.     

The Impact of Natural Disasters on Remittances to Low- and Middle-Income Countries

In this paper, we offer novel empirical evidence on the impact of natural disasters on remittance flows towards low- and middle-income countries. We consider a panel of 98 countries over the period 1990–2010. Our findings show that remittances increase after a disaster, thus contributing ex post to the reconstruction process. At the same time, we find that remittances play a key role in terms of ex ante risk preparedness for those countries that experienced more disruptive events in the past. Finally, when taking into account the interaction with the level of development of the local financial sector, remittances seem to substitute for less efficient financial systems both in terms of ex post response to disasters and in terms of ex ante risk management strategy.     

Trade liberalisation,market deregulation and agricultural performance in Central America

One frequently encounters the argument that trade liberalisation and deregulation of domestic markets in developing countries result in increased incentives for agriculture. This proposition is considered for the Central American countries, all of which passed through fundamental policy change either in the 1980s or 1990s. After characterising the policy regimes in each country over various periods, the analysis moves to an inspection of agricultural trade performance. The evidence indicates that liberalisation of foreign trade and deregulation of domestic markets has not been associated with improved agricultural performance. It is suggested that the failure of agriculture to respond positively to policy changes can be in part explained by an unfavourable trend in world prices of the region's major tradable commodities.     

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.