Financial Liberalization and Convergence of Financial Development Among BRICS Economies

Financial liberalization is now embraced by most of the emerging market economies (EMEs) as a step toward financial development. BRICS are no exception. The greater access to external financial markets and better risk-sharing possibilities are among the various benefits of financial liberalization. Nonetheless, there are theories and empirical evidences that countries get exposed to unpredictable adverse scenarios upon gradual removal of financial market restrictions, and not all countries can reap benefits at equal pace and levels. Financial development is a broad concept, and this chapter tries to examine whether the pace of financial development across BRICS economies is same or it depends on the initial level of financial development. Is there an observable ‘convergence’ in the overall growth process in the financial sector, especially after liberalization, within the BRICS? This chapter, based on a panel dataset from 1980 to 2018, examines beta convergence. The results suggest the existence of both unconditional and conditional beta convergence for overall financial development and for development of financial institutions and markets. The convergence is the fastest in case of financial markets, more specifically, access to financial markets followed by depth and efficiency of financial markets. Convergence is slowest in case of access to financial institutions. Notably, the effect of financial liberalization on financial development is found to be negative when it comes to capital account openness, but trade openness has a positive impact. Most interestingly, results imply that India, the only lower middle income country among BRICS is catching up quite fast with the rest of them in terms of financial development, more through development of financial markets, rather than institutions.