Financial Liberalisation

IMF advises caution on financial liberalisation

FINANCIAL LIBERALISATION: NEW IMF REPORT ADVISES CAUTION

A new study by the International Monetary Fund (IMF), entitled "Effects
of Financial Globalisation on Developing Countries: Some Empirical
Evidence," was released on 17 March. The report explores the
relationship between the liberalisation of financial markets in
developing countries and the results that liberalisation has had on the
economic development of these countries. The authors note that, during
the past two decades, the amount of capital flows from developed to
developing countries has increased dramatically. Economic theory would
suggest that factors such as increased specialisation, lower cost of
capital, and the development of the financial sectors of poor countries
would make financial integration beneficial for developing countries.
However, contrary to theory, the report finds that very few developing
countries have shown significant growth from investment. The report
reveals that liberalisation will not necessarily increase output, and
can in fact harm poor countries, as it makes them more susceptible to
fluctuations in the global financial market, which in most cases they
are not equipped to handle. Although recent research has found no
direct connection between a country's degree of financial openness and
the volatility of its output, a link has been established between
higher levels of development within a country's financial sector and
lower volatility.

The report does not claim to provide the solution for improving the
effects of financial integration on developing countries, but it does
contend that factors such as transparency, reduced corruption, and
government involvement are essential in improving domestic financial
institutions. Such improvements will help boost the positive effect of
financial integration on these countries. It strongly recommends that
stakeholders consider developing countries on a case-specific basis
before determining what practices are best for its growth. A copy of
this report can be accessed at:
http://www.imf.org/external/np/res/docs/2003/031703.pdf.


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