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Financial liberalization in developing countries

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Author Info
Balassa, Bela
Abstract

In the McKinnon and Shaw analysis, financial liberalization is defined to mean the establishment of higher interest rates that equate the demand for, and the supply of, savings. It expresses the views that higher interest rates will lead to increased savings and financial intermediation as well as to improvements in the efficiency of using savings. Balassa summarizes available empirical evidence, indicating that higher real interest rates increase the extent of financial intermediation while increased financial intermediation raises the rate of economic growth in developing countries. Furthermore, evidence is provided on the effects of interest rates on investment efficiency and on economic growth. The paper notes, however, that excessively high interest rates will have unfavorable economic effects. Such a situation can be avoided if the liberalization of the banking system takes place under appropriate conditions. Domestic financial liberalization may eventually be followed by the liberalization of the capital account. But this would have to be preceded by trade liberalization to avoid unnecessary resource shifts. Finally, it is noted that there is a need in most developing countries for improvements in the functioning of the financial sector.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 55.

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Date of creation: 30 Sep 1989
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Handle: RePEc:wbk:wbrwps:55

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Related research
Keywords: Macroeconomic Management; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Insurance&Risk Mitigation;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. van Wijnbergen, S., 1982. "Stagflationary effects of monetary stabilization policies : A quantitative analysis of South Korea," Journal of Development Economics, Elsevier, vol. 10(2), pages 133-169, April. [Downloadable!] (restricted)
  2. Gupta, Kanhaya L, 1987. "Aggregate Savings, Financial Intermediation, and Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 303-11, May. [Downloadable!] (restricted)
  3. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September. [Downloadable!] (restricted)
  4. Mathieson, Donald J., 1980. "Financial reform and stabilization policy in a developing economy," Journal of Development Economics, Elsevier, vol. 7(3), pages 359-395, September. [Downloadable!] (restricted)
  5. Corbo, Vittorio & de Melo, Jaime & Tybout, James, 1986. "What Went Wrong with the Recent Reforms in the Southern Cone," Economic Development and Cultural Change, University of Chicago Press, vol. 34(3), pages 607-40, April.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  7. Khatkhate, Deena R., 1988. "Assessing the impact of interest rates in less developed countries," World Development, Elsevier, vol. 16(5), pages 577-588, May. [Downloadable!] (restricted)
  8. Kapur, Basant K, 1976. "Alternative Stabilization Policies for Less-developed Economies," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 777-95, August. [Downloadable!] (restricted)
  9. Cho, Yoon Je, 1988. "The effect of financial liberalization on the efficiency of credit allocation : Some evidence from Korea," Journal of Development Economics, Elsevier, vol. 29(1), pages 101-110, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adam McCarty, 2001. "Microfinance in Vietnam - A Survey of Schemes and Issues," Finance 0110001, EconWPA. [Downloadable!]
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