The latest global financial and economic crisis of 2008 has shown the need
to re-examine the desirability of financial liberalization.
This book is undertaking such a study on the issue of financial and market
liberalization by adopting sophisticated econometric methods.
It examines the effects of financial liberalization on economic development and
social welfare using a case study approach on a sample of three Sub-Saharan African and an
Asian country in which financial liberalization reforms were implemented. Further, it
highlights some key causes of the failure of reform, and the policies and institutions
that are needed to create an environment for successful financial liberalization. From the
detailed country assessments, various policies such as effective competition in the
banking sector, sound legal system, fiscal discipline and financial institutional
development are identified, adoption of which can improve the efficiency of resource
allocation, boost savings and impact growth, and thus lead to welfare enhancement.
Table of Contents
1 Introduction 1
1.1 Contemporary Issues in Finance 1
1.1.1 Financial Repression 1
1.1.2 Financial Liberalization 2
1.1.3 Financial Crisis and Financial Contagion 2
1.1.4 International Capital Mobility/Capital Control 3
1.2 Financial Liberalization: Opposing Views 5
1.2.1 Approaches to Financial Liberalization 6
1.2.2 Financial Liberalization and Country Experience in Africa and Asia 7
1.2.3 Benefits of Financial Liberalization: An Empirical Issue 10
1.3 The Objectives of this Book 11
1.4 Methodology 12
1.4.1 Time Series Financial Econometrics 13
1.4.2 Cost Benefit Analysis 13
1.5 Contribution of this Book 13
1.6 The Structure of the Book 15
2 Background, Structure and Financial Reforms 17
2.1 Introduction 17
2.2 The Case of Kenya 20
2.2.1 The Structure of the Financial System 22
2.2.2 Agricultural Sector and Other Policies Framework 27
2.2.3 Liberalization and the Era of Structural Adjustments 31
2.3 The Case of Malawi 33
2.3.1 Structure of the Financial System 38
2.3.2 Agricultural Sector and Other Policies Framework 42
2.4 The Case of Botswana 47
2.4.1 Structural Developments of the Financial System 52
2.4.2 Supplementing Role of Foreign Aid in Botswana: The Two-Gap Model 58
2.4.3 Trends and Policies in Agriculture and Other Sectors 61
2.5 The Thai Financial System 66
2.6 Conclusion 67
3 Literature Review 69
3.1 Introduction 69
3.2 Financial Development and Economic Development 71
3.3 Financial Liberalization 74
3.3.1 Financial Liberalization in Sub-Saharan Africa 83
3.3.2 The Thai Case 87
3.4 Conclusion 89
4 The Theory of Financial Liberalization and Its Economic Impact: An Assessment 91
4.1Financial Liberalization 91
4.1.1 A Brief Theoretical Assessment 91
4.1.2 Observations from the Case Study 98
4.2 Contrasts between the Theory and Country Performance 100
4.2.1 Introduction 100
4.2.2 Economic Impact of the Recent Financial Reforms: Kenya 101
4.2.3 Malawi 121
4.2.4 Botswana 129
4.3 Conclusion 139
5 An Analysis of the Economic Outcome of Financial Liberalization 141
5.1 Introduction 141
5.2 A Simple Model of Imperfect Competition and Interest Rate Spread 142
5.2.1 Liberalization: Market Determined Outcome 144
5.2.2 Financial Repression 146
5.2.3 The Level of Fixed Costs as a Barrier to Entry 152
5.2.4 Graph of Fixed Cost and New Entry 155
5.2.5 Dynamics of how much the Interest Rate goes up after Liberalization 160
5.3 Financial Reforms and Absence of Entry by New Foreign Banks 162
5.4 Conclusion 168
6 Testing the Potential Impact of Economic Changes on Savings in African Countries
175
6.1 Introduction 175
6.2 Econometric Research on the Effect of Various Financial Conditionings 176
6.3 Reforms and Savings Mobilization: Comparative Analysis 177
6.3.1 Measures of Financial Liberalization 187
6.3.2 Basic Theory and Other Specifications 189
6.4 The Macroeconometric Model 190
6.4.1 VECM Set-up 192
6.5 Data and an Analysis of Econometric Results 194
6.6 Impacts of Market Liberalization on the Macroeconomy and Growth 206
6.6.1 Hypothetical Scenario for Kenya and Malawi 212
6.7 Conclusion 216
7 Welfare Implications of Financial Liberalization in Thailand: A Cost-Benefit
Analysis 221
7.1 Introduction 221
7.2 Financial Liberalization and Its Implications in Thailand 222
7.3 Welfare Economics Framework: Social Choice and Cost Benefit Analysis of Globalization
and Financial Liberalization 223
7.4 Costs and Benefits of Financial Liberalization (and Financial Crisis): Illustrative
Numerical Estimation of the Costs and Benefits of Financial Liberalization 226
7.4.1 Financial Benefits 226
7.4.2 Financial Costs 227
7.5 Methodology, Numerical Estimates and Data Sources 227
7.6 Welfare Implications of Economic Growth 231
7.7 Conclusions 233
8 Summary, Findings and Conclusion 249
8.1 Background and Motivation 249
8.2 The Summary and Empirical Results 250
8.3 Policy and Institutional Implications 252
Appendix 255
1 Movement from Repression to Liberalization 255
Bibliography 277
Index 293
316 pages, Hardcover
