IDEAS home Printed from https://ideas.repec.org/p/gwi/wpaper/2009-02.html
   My bibliography  Save this paper

Financial Liberalization, Financial Restraint and Entrepreneurial Development

Author

Listed:
  • M. Shahe Emran

    () (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Joseph E. Stiglitz

    () (Department of Economics and IPD, Columbia University)

Abstract

This paper argues that there is a fundamental conflict between financial liberalization and private sector led development strategy in developing countries. Using a simple model of occupational choice with moral hazard, it shows that under financial liberalization banks may (i) fail to finance new entrepreneurs because of poaching externality, and (ii) systematically favor pro jects with front-loaded returns at the expense of pro jects with strong learning effects. We identify two types of policies that are helpful in escaping from a no entrepreneurial experimentation equilibrium: intersectoral and intertemporal policies. Among intersectoral policies, a deposit rate ceiling, or a tax on the deposits coupled with a contingent subsidy to the new industrial financing (but not interest rate subsidy) may be helpful for entrepreneurial discovery. The intersectoral policies are, however, not effective in weeding out short-termism in pro ject choice. Among intertemporal policies, a dual track policy where competition is preserved in the lending to competing activities (agriculture) but limited duration monopoly is awarded to industrial lending is shown to be effective for both the discovery of new industrial entrepreneurs and tackling shorttermism in project choices.

Suggested Citation

  • M. Shahe Emran & Joseph E. Stiglitz, 2009. "Financial Liberalization, Financial Restraint and Entrepreneurial Development," Working Papers 2009-02, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2009-02
    as

    Download full text from publisher

    File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Emran_IIEPWP2009-2.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
    2. Nicola Cetorelli, 2001. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, American Finance Association, vol. 56(2), pages 617-648, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. O’Toole Conor M., 2014. "Does Financial Liberalisation Improve Access to Investment Finance in Developing Countries?," Journal of Globalization and Development, De Gruyter, vol. 5(1), pages 1-34, June.
    2. Yazdani, Naveed & Mamoon, Dawood, 2012. "The economics and philosophy of globalization," MPRA Paper 36091, University Library of Munich, Germany.
    3. M. Shahe Emran & Virginia Robano & Stephen C. Smith, 2014. "Assessing the Frontiers of Ultrapoverty Reduction: Evidence from Challenging the Frontiers of Poverty Reduction/Targeting the Ultra-poor, an Innovative Program in Bangladesh," Economic Development and Cultural Change, University of Chicago Press, vol. 62(2), pages 339-380.
    4. Ang, James, 2009. "Financial Liberalization Or Repression?," MPRA Paper 14497, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial Liberalization; Financial Restraint; Entrepreneurail Discovery; Learning; Dual Track Policy;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gwi:wpaper:2009-02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kyle Renner). General contact details of provider: http://edirc.repec.org/data/iigwuus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.