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Financial Liberalization: Does It Pay to Join the Party?

Author

Listed:
  • 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?," Economía 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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    Cited by:

    1. Pagés, Carmen & Micco, Alejandro, 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. Micco, Alejandro & Pagés, Carmen, 2006. "The Economic Effects of Employment Protection: Evidence from International Industry-Level Data," IZA Discussion Papers 2433, Institute of Labor Economics (IZA).
    5. Raphael Bergoeing Vela & Andrés Hernando & Andrea Repetto, 2010. "Market Reforms and Efficiency Gains in Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 37(2 Year 20), pages 217-242, December.
    6. Kułyk Piotr, 2012. "The imperfections of a credit market in agriculture," Management, Sciendo, vol. 16(1), pages 250-263, May.
    7. Hileman, Garrick, 2012. "The seven mechanisms for achieving sovereign debt sustainability," Economic History Working Papers 42878, London School of Economics and Political Science, Department of Economic History.
    8. Galindo, Arturo & Izquierdo, Alejandro & Rojas-Suárez, Liliana, 2010. "Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks?," IDB Publications (Working Papers) 1689, Inter-American Development Bank.
    9. 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.
    10. 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.
    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. Fritz, Barbara & Mühlich, Laurissa, 2006. "Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas?," GIGA Working Papers 38, GIGA German Institute of Global and Area Studies.
    13. 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.
    14. Sulaiman, Saidu & Masih, Mansur, 2017. "Is liberalizing finance the game in town for Nigeria ?," MPRA Paper 95569, University Library of Munich, Germany.
    15. Mahmoud Haddad & Sam Hakim, 2015. "Can Banks Lead the Economic Recovery of the Arab Spring?," Working Papers 965, Economic Research Forum, revised Nov 2015.
    16. Gormley, Todd A., 2014. "Costly information, entry, and credit access," Journal of Economic Theory, Elsevier, vol. 154(C), pages 633-667.
    17. Adeyefa, Felix Ademola, 2022. "Financial Sector Liberalisation and Capital Market Growth in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(8), pages 761-770, August.
    18. 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.
    19. 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.
    20. 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.
    21. 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.

    More about this item

    Keywords

    financial liberalization; credit markets; property rights;
    All these keywords.

    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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