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Finance and Development: Institutional and Policy Alternatives to Financial Liberalization

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  • Philip Arestis
  • Machiko Nissanke
  • Howard Stein

Abstract

There are many recent worldwide examples of severe financial crises that are linked to periods of financial liberalization. Given the ubiquity of these crises, there is the legitimate question of why governments still pursue financial liberalization policies. Answers to this question range from the recent institutionalization of norms of "acceptable" financial policies and perceived potential gains of attracting private capital inflows to the implied gains arising from the economic logic embedded in the theory underlying financial liberalization. This paper will focus on the latter arguing that financial transformation along the lines proposed by McKinnon-Shaw has engendered widespread banking crises precisely because of the weak foundations of the theory. The financial liberalization theory is critically evaluated on both theoretical and empirical grounds. An alternative theoretical approach is presented that focuses on ways to effect financial and banking transformation that is more consistent with economic development that draws on an institutional-centric perspective.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_377.

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Date of creation: Apr 2003
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Handle: RePEc:lev:wrkpap:wp_377

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  1. de Melo, Jaime & Tybout, James, 1986. "The Effects of Financial Liberalization on Savings and Investment in Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 34(3), pages 561-87, April.
  2. Reinhart, Carmen & Tokatlidis, Ioannis, 2005. "Before and After Financial Liberalization," MPRA Paper 6986, University Library of Munich, Germany.
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Cited by:
  1. repec:hal:cepnwp:hal-00574136 is not listed on IDEAS
  2. Christine Sinapi, 2011. "Institutional Prerequisites of Financial Fragility within Minsky's Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'," Economics Working Paper Archive wp_674, Levy Economics Institute.
  3. repec:hal:wpaper:hal-00574136 is not listed on IDEAS

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