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The Future Of Financial Liberalization In South Asia

  • Ashima Goyal

    ()

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

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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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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  1. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2004. "Smoothing sudden stops," Journal of Economic Theory, Elsevier, vol. 119(1), pages 104-127, November.
  2. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  3. Kawai, Masahiro, 2009. "Reform of the International Financial Architecture: An Asian Perspective," ADBI Working Papers 167, Asian Development Bank Institute.
  4. Ashima Goyal, 2009. "Global Financial Architecture: Past and Present Arguments, Advice, Action," Working Papers id:2130, eSocialSciences.
  5. Rana Ejaz Ali Khan & Qazi Muhammad Adnan Hye, 2013. "Financial liberalization and demand for money: a case of Pakistan," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 175-198, July-Dece.
  6. Ashima Goyal, 2010. "Regulatory Structure for Financial Stability and Development," Finance Working Papers 22778, East Asian Bureau of Economic Research.
  7. 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.
  8. Ashima Goyal, 2006. "Incentives from Exchange Rate Regimes in an Institutional Context," Macroeconomics Working Papers 22375, East Asian Bureau of Economic Research.
  9. Ashima Goyal, 2006. "Regulation and Deregulation of the Stock Market in India," Chapters, in: Deregulation and its Discontents, chapter 9 Edward Elgar Publishing.
  10. S. Narayan, 2009. "India," Chapters, in: The Political Economy of Trade Reform in Emerging Markets, chapter 7 Edward Elgar Publishing.
  11. Partha Sen, 2007. "Capital inflows, financial repression, and macroeconomic policy in India since the reforms," Oxford Review of Economic Policy, Oxford University Press, vol. 23(2), pages 292-310, Summer.
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