Benefits Of Financial Liberalization

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Introduction The degree of integration of financial markets around the world increased dramatically during the late 1980s and 1990s. This was achieved by many countries deregulating domestic financial markets and pursuing financial liberalisation. (Agenor, 2001). In short, financial liberalisation aims to promote the role of the market and minimise the role of the state in determining who gets and gives credit and at what price. (Baswir, 2007) I am in agreeance that financial liberalisation and increased access to international financial markets brings benefits and disruption to developing economies. However, after reviewing the literature and analysing the empirical evidence, I believe the long-term benefits outweigh any initial…show more content…
( Until the 1980s, most developing economies had highly repressed financial systems. The term “financial repression” is a term that was introduced by Shaw and Mckinnon in 1973 to refer to restrictive policies which hinder the progress of economies in developing countries. It includes measures such as interest rate ceilings, credit allocation and high reserve requirements. (Investopedia) Mckinnon (1973) and Goldsmith (1969) were the first to seriously challenge this conventional theory and are among the most influential economists in drawing attention to the benefits of financial liberalisation for developing economies. (Watchel, P 2001) There are three ways in which financial repression was undesirable and these were poor results, excessive costs, and pressures from…show more content…
This creates an excess demand for credit thus resulting in banks having to ration their lending by allocating credit to favoured sectors and firms by administrative decision, rather than by market mechanisms. This constrains investments and in turn lowers the rate of economic growth. (Pill, H. Pradhan, M 1997) A system of financial repression is also costly. Banks often required recapitalization and the takeover of their external debts by governments. Loan collection efforts were insufficient, and borrowers treated loans from the state banks simply as transfers which meant loan repayments were weak. ( Most importantly growth of trade, travel, and migration as well as the improvement of communications meant that financial repression was becoming under increasing pressure. The increased access to international financial markets broke down the controls on capital outflows on which the supply of low-cost deposits had depended.

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