And while the inflow of short-term funds occurs over a period of time, the outflow can be sudden, concentrated, and extremely destabilising, causing acute misery to the people, as has been seen in the case of the East and South-East Asian countries. McKinnon and Shaw first highlighted the dangers of financial repression in a rigorous way, and argued the case for maximum financial liberalisation.
The book shows how mutual dependence between governing elites and financial capital holders in the United States in the aftermath of the Revolutionary War led to a situation where it was in their mutual interests to cooperate in the long-term.
Since they are able to reduce the costs associated with intermediation between savers and investors through economies of scale, risk diversification, and other methods described in Appendix 1, they can offer more attractive deposit accounts to savers and lower loan rates.
Weak financial systems can destabilise local economies, making them more vulnerable to external shocks, and may threaten global financial markets. The case of—both pre colonial, and colonial—India, on the other hand, presents a scenario where rulers were consistently independent of financial capital holders, and hence had little incentive to pay the requisite costs in order to institutionalize a cooperative relationship.
Borrowers are often unable to service their loans, due to poor quality lending and high interest rates. Currency overvaluation and cuts in government expenditure are both deflationary.
Risks Inherent to Liberalisation The Financial Stability Institute - www. On the other hand, higher real interest rates could attract massive capital inflows, leading to excessive currency appreciation.
In Latin America in the s, financial liberalisation went wrong because there was an explosion of government debt, economic instability and excessively high real interest rates, which led to bankruptcies, bank failures and prolonged government debt, which leads to cuts in government expenditure.
Their arguments, however, emphasise different points. What is clear from all the evidence across countries and continents is that if financial reforms are to succeed, they must be implemented in an appropriate macroeconomic, financial and institutional framework, with proper sequencing between internal and external liberalisation.
Financial liberalisation in their view will lead to higher economic growth, because: By increasing the savings rate and the availability of savings for investment, facilitating and encouraging inflows of foreign capital, financial sector development can boost long-run growth. An efficient and stable financial sector is important for economic growth and poverty reduction.
Higher interest rates will increase total credit intermediation through banks. Macro-economic performance also deteriorated - countries with large negative real interest rates experienced lower allocative efficiency and growth rates.
The increased liabilities of the banking system, resulting from higher real interest rates, enables the banking system to lend more resources for productive investment in a more efficient way.
There was growing dissatisfaction with the way in which regulation of financial markets was working. The experience with financial liberalisation reveals a strong correlation between liberalisation and financial crisis.
Their argument, which is graphically illustrated in Appendix 2, was that the interest rates of the banking system should be liberalised to achieve faster economic growth.
This is surprising since money and credit markets are institutions, and research on institutions has increasingly become prominent in economics, sociology, and political science in the last thirty years or so. Financial systems remained under-developed, lending patterns were inefficient and failed to achieve their distributional goals.
Liberalisation of the capital account increases the inflow of foreign capital, but at the same time threatens the stability of the financial institutions, by increasing the exchange rate and domestic lending risks.The final essay draws lessons from the Kenyan experience, in light of the findings on access to finance in South Sudan, to formulate proposals for innovative financial services for SMEs and with regard to the regulatory framework for financial sector development in South Sudan.
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18 Financial Sector Development and Economic Growth: An Empirical Analysis of Developing Countries suggesting that financial sector development. Published: Mon, 5 Dec The theoretical background of this paper is the Agency Theory. The assumption made is that information asymmetry exists at all stages of the banking services supply chain and that actors are rational utility maximizes.
Financial sector development improves access to capital and firms with higher access to external finance pursue growth opportunities using debt.
Financial sector development helps firms to adjust their capital structures quickly thereby minimizing the costs of staying off target. The financial sector charges high set up cost against financial services during early periods of development to gain advantages from the screening and risk pooling.
This cost is beyond the affordability of the poor people.Download