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The Future Of Financial Liberalization In South Asia

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  • Ashima Goyal

    ()
    (Professor, Indira Gandhi Institute of Development Research, Mumbai, India)

Abstract

This paper overviews financial liberalization in three South Asian countries — Bangladesh, India and Pakistan — in order to derive lessons for future reforms. It investigates how freeing domestic financial markets, improving capital account convertibility, and restructuring regulations have impacted the process of financial liberalization in South Asia. The paper shows that the capital account was most liberalized in Pakistan, and that Bangladesh had the least market development of the three countries under consideration. The study also reveals that of the two similar-sized countries (i.e. Bangladesh and Pakistan), Pakistan had experienced several financial crises that had required “external rescue”. Bangladesh, in contrast, needed external rescue only once. India did better than Pakistan and Bangladesh, most likely because it followed a strategic plan according to which full capital account liberalization followed the deepening of domestic markets and improvements to government finances. The experience of the global crisis validated the Indian strategy and demonstrated that foreign entry, while beneficial, cannot resolve all issues. We conclude that deepening domestic markets and better domestic and international regulation are necessary prerequisites for full convertibility, and that these preconditions will be best met if future liberalization is adapted to domestic needs such as financial inclusion, infrastructure finance, and market deepening.

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Bibliographic Info

Article provided by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its journal Asia-Pacific Development Journal.

Volume (Year): 19 (2012)
Issue (Month): 1 (June)
Pages: 63-96

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Handle: RePEc:unt:jnapdj:v:19:y:2012:i:1:p:63-96

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Keywords: Financial liberalization; capital account convertibility; regulation; inclusion; markets; South Asia; Bangladesh; Pakistan;

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References

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  1. Ashima Goyal, 2010. "Regulatory Structure for Financial Stability and Development," Finance Working Papers 22778, East Asian Bureau of Economic Research.
  2. Ricardo Caballero & Arvind Krishnamurthy, 2001. "Smoothing Sudden Stops," NBER Working Papers 8427, National Bureau of Economic Research, Inc.
  3. Masahiro Kawai, 2010. "Reform Of The International Financial Architecture: An Asian Perspective," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(01), pages 207-242.
  4. Ashima Goyal, 2009. "Global Financial Architecture : past and present arguments, advice, action," Finance Working Papers 22932, East Asian Bureau of Economic Research.
  5. Ashima Goyal, 2008. "The Structure of Inflation, Information and Labour Markets - Implications for monetary policy," Macroeconomics Working Papers 22378, East Asian Bureau of Economic Research.
  6. Ashima Goyal, 2006. "Incentives from exchange rate regimes in an institutional context," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2006-015r, Indira Gandhi Institute of Development Research, Mumbai, India.
  7. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
  8. Partha Sen, 2007. "Capital Inflows, Financial Repression And Macroeconomic Policy In India Since The Reforms," Working papers, Centre for Development Economics, Delhi School of Economics 157, Centre for Development Economics, Delhi School of Economics.
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