View
221
Download
0
Category
Preview:
Citation preview
8/2/2019 If Financial Openness is More Costly for Developing
1/18
If financial openness is morecostly for developing countries,
why have so many undertakenliberalisation in recent years?
8/2/2019 If Financial Openness is More Costly for Developing
2/18
Financial liberalisation in the developing world
0
25
50
75
100
125
150
175
200
225
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East Asia & Pacific (developingonly)
Europe & Central Asia(developing only)
Latin America & Caribbean(developing only)
Middle East & North Africa
(developing only)
OECD members
Total value of stocks traded (% GDP)
8/2/2019 If Financial Openness is More Costly for Developing
3/18
0
5
10
15
20
25
30
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
East Asia & Pacific (developingonly)
Europe & Central Asia(developing only)
Latin America & Caribbean(developing only)
Middle East & North Africa(developing only)
South Asia
Financial liberalisation in the developing worldInterest rate spreads (lending rate minus deposit rate)
8/2/2019 If Financial Openness is More Costly for Developing
4/18
Financial liberalisation in the developing worldNet inflows of portfolio equity (in current US$)
-20
-10
0
10
20
30
40
50
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Billion
s
East Asia & Pacific(developing only)
Europe & CentralAsia (developing only)
Latin America &Caribbean(developing only)
Middle East & NorthAfrica (developingonly)
South Asia
8/2/2019 If Financial Openness is More Costly for Developing
5/18
Good news, bad news?Financial liberalisation is more costly for developing countries
Domestic financial liberalisation Capital account liberalisation
Greater fluctuation in output gap in developing country compared to developedcountry note that variation is muchlarger in developing country after t = 0.
8/2/2019 If Financial Openness is More Costly for Developing
6/18
Costs of financial liberalisationFinancial fragility and vulnerability to crisis
-15
-10
-5
0
5
10
15
20
25
-4
-2
0
2
4
6
8
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
Millions
Annual GDP growth: LatinAmerica and Caribbean
World annualGDP growth
Portfolio equity in Latin America& Caribbean (developing only)
Portfolio equity (current US$)Annual GDP Growth (%)
0
10
20
30
40
50
60
70
80
-15
-10
-5
0
5
10
15
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Annual GDP Growth (%)
Value of stocks traded(% GDP): Thailand
Annual GDP growth: Thailand
Value of stocks traded (% GDP)
In 1996, five Asian economies(South Korea, Indonesia,Malaysia, Thailand and thePhillipines) received net privatecapital inflows amounting toUS$93.0 billion. One year later
in 1997, they experienced anestimated outflow of US$12.2billion.
Access to foreign capital flowsas a means of financing lead toa leveraging process in thepublic and private sector, which
in turn led to questions aboutthe sustainability of the crisis.
Increased dependence onforeign investment.
Crowding out effects?
8/2/2019 If Financial Openness is More Costly for Developing
7/18
Costs of financial liberalisationConstraints on policy flexibility
Inflows 1992-97
avg.
2003-08
avg.
Current account balancealldeveloping countries ex. China,
Russia, Middle East
-96.7 -38.9
Net external financingalldeveloping countries ex. China,
Russia, Middle East
225.6 470.0
Increase in reservesalldeveloping countries ex. China,
Russia, Middle East
39.7 218.6
8/2/2019 If Financial Openness is More Costly for Developing
8/18
Gains from financial liberalisationFinancial repression
8/2/2019 If Financial Openness is More Costly for Developing
9/18
Removal of capital controls allow risk sharing, through global diversificationof portfolios.
This allows higher-yield (higher-risk) investment to be undertaken for thesamelevel of risk, i.e. more projects can be considered (Obstfeld, 1994).
Gains from financial liberalisationImproved risk sharing mechanisms
8/2/2019 If Financial Openness is More Costly for Developing
10/18
Gains from financial liberalisationAlleviation of capital scarcity
8/2/2019 If Financial Openness is More Costly for Developing
11/18
Is it worth it?Empirical evidence of gains
Have developing countries experienced faster economic growth?
Not significant!
8/2/2019 If Financial Openness is More Costly for Developing
12/18
Is it worth it?Empirical evidence of gains
Have developing countries experienced increased investment?
Not significant!
8/2/2019 If Financial Openness is More Costly for Developing
13/18
Is it worth it?Empirical evidence of gains
Have developing countries experienced lower inflation?
Not significant!
8/2/2019 If Financial Openness is More Costly for Developing
14/18
Then, why liberalise?Are the costs exaggerated?
8/2/2019 If Financial Openness is More Costly for Developing
15/18
Then, why liberalise?Political economy considerations
8/2/2019 If Financial Openness is More Costly for Developing
16/18
Then, why liberalise?Political economy considerations
Fiscal policy discipline
Redirection of public spendingfrom subsidies
Tax reform
Interest rates that marketdetermined
Competitive exchange rates
Trade liberalisation
Liberalisation of inward foreign
direct investmentPrivatisation of state enterprises
Deregulation
Legal security for property rights
The Washington Consensus
8/2/2019 If Financial Openness is More Costly for Developing
17/18
Current account convertibility and capitalaccount convertibility are two completelydifferent concepts, with different
implications altogether.
ConclusionTo liberalise ornot to liberalise?
8/2/2019 If Financial Openness is More Costly for Developing
18/18
Discussion
Recommended