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Financial liberalization and allocative dfficiency of capital

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  • Kukenova, Madina

Abstract

Financial liberalization may have a positive effect on growth not only through the increase in the quantity of the available funds, but also through a more efficient allocation of resources across firms and sectors. Despite this intuitive appeal, there is little empirical evidence on the positive effect of financial liberalization on capital allocation. The main difficulty of investigating the linkage between liberalization of financial markets and capital allocation efficiency lies in the fact that the efficiency of capital allocation is not directly observable. One way to address this issue is to evaluate the effect of financial liberalization within the Heckscher-Ohlin framework. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of the funds, which undermines competitiveness of the economy and inhibits its long run growth. This paper tests the allocative efficiency hypothesis by evaluating the effect of stock market liberalization on the survival of different product categories using export data for 91 countries over the period of 1975-2003. Preliminary results suggest that after liberalization of the domestic stock market, products employing intensively scarce factors exit at a relatively higher rate from a country's export portfolio. In other words, following liberalization episodes, a country tends to rebalance its export portfolio towards products consistent with its factor's endowments.

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  • Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5670
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    References listed on IDEAS

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    Cited by:

    1. Asongu Simplice, 2014. "Fresh Patterns of Liberalization, Bank Return and Return Uncertainty in Africa," Working Papers 14/004, African Governance and Development Institute..
    2. Simplice Asongu & Vanessa Tchamyou, 2015. "The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency," Working Papers 15/053, African Governance and Development Institute..
    3. Simplice A Asongu, 2013. "How has politico-economic liberalization affected financial allocation efficiency? Fresh African evidence," Economics Bulletin, AccessEcon, vol. 33(1), pages 663-676.
    4. Omer GOKCEKUS & Kevin BENGYAK, 2015. "Learning Heckscher-Ohlin Model in Five Easy Steps," Journal of Economics and Political Economy, KSP Journals, vol. 2(1), pages 137-143, March.

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    Keywords

    Emerging Markets; Debt Markets; Markets and Market Access; Currencies and Exchange Rates; Economic Theory&Research;

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