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Financial Liberalization: Does It Pay to Join the Party?

Author

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  • Arturo J. Galindo

    ()

  • Alejandro Micco

    ()

  • Guillermo Ordoñez

    ()

Abstract

Financial liberalization is a highly controversial policy. Despite the fact that almost all the regions of the world have undergone liberalization of their financial markets, its effect on the performance of different economic sectors remains a question. In our research, we find that financial liberalization reduces the cost of capital, boosting the relative growth rates of economic sectors that for technological reasons rely heavily on external (to the firm) finance. This result, however, depends on the quality of institutions supporting credit markets. The effects of financial liberalization are more notable in countries that have and enforce regulations to protect property rights. In this sense, the answer to the question in the title of the paper is not clear-cut. The impact of financial liberalization on growth depends on underlying institutional factors.

Suggested Citation

  • Arturo J. Galindo & Alejandro Micco & Guillermo Ordoñez, 2002. "Financial Liberalization: Does It Pay to Join the Party?," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2002), pages 231-262, August.
  • Handle: RePEc:col:000425:008686
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    Citations

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    Cited by:

    1. Carmen Pagés & Alejandro Micco, 2004. "Employment Protection and Gross Job Flows: A Differences-in-Differences Approach," IDB Publications (Working Papers) 1106, Inter-American Development Bank.
    2. Galindo, Arturo & Schiantarelli, Fabio & Weiss, Andrew, 2007. "Does financial liberalization improve the allocation of investment?: Micro-evidence from developing countries," Journal of Development Economics, Elsevier, vol. 83(2), pages 562-587, July.
    3. Carmen Pagés-Serra & Alejandro Micco, 2008. "Efectos económicos de la protección del empleo: Elementos de juicio a partir de datos internacionales a nivel de actividad económica," Research Department Publications 4497, Inter-American Development Bank, Research Department.
    4. Braun, Matias & Raddatz, Claudio, 2007. "Trade liberalization, capital account liberalization and the real effects of financial development," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 730-761, September.
    5. Micco, Alejandro & Pagés, Carmen, 2006. "The Economic Effects of Employment Protection: Evidence from International Industry-Level Data," IZA Discussion Papers 2433, Institute for the Study of Labor (IZA).
    6. Vessela Todorova, 2011. "Theoretical Link between the Economic and Financial Crises in Evolution," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 55-74.
    7. Mahmoud Haddad & Sam Hakim, 2010. "Have Foreign Banks Contributed to the Spread of the Global Financial Crisis to Saudi Arabia?," Working Papers 537, Economic Research Forum, revised 08 Jan 2010.
    8. Eichengreen, Barry & Gullapalli, Rachita & Panizza, Ugo, 2011. "Capital account liberalization, financial development and industry growth: A synthetic view," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1090-1106, October.
    9. Alejandro Micco & Carmen Pagés-Serra, 2004. "Protección del empleo y flujo bruto de puestos de trabajo: un enfoque de diferencias en diferencias," Research Department Publications 4366, Inter-American Development Bank, Research Department.
    10. Kułyk Piotr, 2012. "The imperfections of a credit market in agriculture," Management, Sciendo, vol. 16(1), pages 250-263, May.
    11. Levchenko, Andrei A. & Rancière, Romain & Thoenig, Mathias, 2009. "Growth and risk at the industry level: The real effects of financial liberalization," Journal of Development Economics, Elsevier, vol. 89(2), pages 210-222, July.
    12. Mahmoud Haddad & Sam Hakim, 2015. "Can Banks Lead the Economic Recovery of the Arab Spring?," Working Papers 965, Economic Research Forum, revised Nov 2015.
    13. Gehringer, Agnieszka, 2015. "Uneven effects of financial liberalization on productivity growth in the EU: Evidence from a dynamic panel investigation," International Journal of Production Economics, Elsevier, vol. 159(C), pages 334-346.
    14. Barbara Fritz & Laurissa Mühlich, 2006. "Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas?," GIGA Working Paper Series 38, GIGA German Institute of Global and Area Studies.
    15. Almeida, Rita K. & Aterido, Reyes, 2011. "On-the-job training and rigidity of employment protection in the developing world: Evidence from differential enforcement," Labour Economics, Elsevier, vol. 18(S1), pages 71-82.
    16. Gormley, Todd A., 2014. "Costly information, entry, and credit access," Journal of Economic Theory, Elsevier, vol. 154(C), pages 633-667.

    More about this item

    Keywords

    financial liberalization; credit markets; property rights;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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