Liberalization, Financial Instability and Economic Development (Anthem Frontiers of Global Political Economy, 1, Band 1) - Softcover

Akyüz, Y¿lmaz

Softcover

ISBN 10: 1783082623 ISBN 13: 9781783082629

Verlag: Anthem Press, 2014

Inhaltsangabe

Weighing up the costs and benefits of economic interdependence in a finance-driven world, this book argues that globalization, understood and promoted as absolute freedom for all forms of capital, has been oversold to the Global South, and that the South should be as selective about globalization as the North. ‘Liberalization, Financial Instability and Economic Development’ challenges the orthodoxy on the link between financial deepening and economic growth, as well as that between the efficiency of financial markets and the benefits of liberalization. Ultimately, the author urges developing countries to control capital flows and asset bubbles, preventing financial fragility and crises, and recommends regional policy options for managing capital flows and exchange rates.

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Über die Autorin bzw. den Autor

Y¿lmaz Akyüz is chief economist at the South Centre, an intergovernmental think tank for developing countries based in Geneva, Switzerland. 

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Liberalization, Financial Instability and Economic Development

By Yilmaz Akyüz

Wimbledon Publishing Company

Copyright © 2014 South Centre
All rights reserved.

ISBN: 978-1-78308-262-9

Contents

Introduction, 1, 
Part One Liberalization, Stability and Growth, 
Chapter I Financial Liberalization: The Key Issues, 
Chapter II Managing Financial Instability in Emerging Markets: A Keynesian Perspective, 
Chapter III From Liberalization to Investment and Jobs: Lost in Translation, 
Chapter IV Exchange Rate Management, Growth and Stability: National and Regional Policy Options in Asia, 
Chapter V Reforming the IMF: Back to the Drawing Board, 
Part Two The Global Economic Crisis and Developi ng Countries, 
Chapter VI The Current Global Financial Turmoil and Asian Developing Countries, 
Chapter VII The Global Economic Crisis and Asian Developing Countries: Impact, Policy Response and Medium-Term Prospects, 
Chapter VIII The Staggering Rise of the South?, 

CHAPTER 1

FINANCIAL LIBERALIZATION: THE KEY ISSUES1

A. Introduction

In recent years financial policies in both industrial and developing countries have put increased emphasis on the market mechanism. Liberalization was partly a response to developments in the financial markets themselves: as these markets innovated to get round the restrictions placed on them, governments chose to throw in the towel. More importantly, however, governments embraced liberalization as a doctrine.

In developing countries, the main impulse behind liberalization has been the belief, based on the notion that interventionist financial policies were one of the main causes of the crisis of the 1980s, that liberalization would help to restore growth and stability by raising savings and improving overall economic efficiency; greater reliance on domestic savings was necessary in view of increased external financial stringency. However, these expectations have not generally been realized. In many developing countries, instead of lifting the level of domestic savings and investment, financial liberalization has, rather, increased financial instability. Financial activity has increased and financial deepening occurred, but without benefiting industry and commerce.

In many industrial countries the financial excesses of the 1980s account for much of the sharp slowdown of economic activity in the 1990s. Financial deregulation eased access to finance and allowed financial institutions to take greater risks. The private sector accumulated large amounts of debt at very high interest rates in the expectation that economic expansion would continue to raise debt servicing capacity while asset price inflation would compensate for high interest rates. Thus, when the cyclical downturn came, borrowers and lenders found themselves overcommitted: debtors tried to sell assets and cut down activity in order to retire debt, and banks cut lending to restore balance sheets. Thus, the asset price inflation was replaced by debt deflation and credit crunch.

The recent experience with financial liberalization in both industrial and developing countries holds a number of useful lessons. This chapter draws on this experience to discuss some crucial issues in financial reform in developing countries. The focus is on how to improve the contribution of finance to growth and industrialization; developing the financial sector and promoting financial activity is not synonymous with economic development.

B. Interest rates and Savings

One of the most contentious issues in financial policy is the effect of interest rates on savings. There can be little doubt that short-term, temporary swings in interest rates have little effect on private savings behavior since that is largely governed by expectations and plans regarding current and future incomes and expenditures: they alter the level of savings primarily by affecting the levels of investment and income. However, when there is a rise in interest rates that is expected to be permanent (for instance, because it is the result of a change in the underlying philosophy in the determination of interest rates), will consumer behavior remain the same, or will the propensity to save rise? The orthodox theory expects the latter to occur, and thus argues that removing "financial repression" will have a strong, positive effect on savings (Shaw 1973, 73).

Empirical studies of savings behavior typically do not distinguish permanent from temporary changes in interest rates. Recent evidence on savings behavior in a number of developing countries that changed their interest rate policy regimes shows no simple relation between interest rates and private savings. This is true for a wide range of countries in Asia and the Middle East (Indonesia, Malaysia, Philippines, Sri Lanka, Republic of Korea and Turkey: Cho and Khatkhate 1989; Amsden and Euh 1990; Lim 1991; Akyüz 1990), Africa (Ghana, Kenya, Malawi, Tanzania and Zambia: Nissanke 1990), and Latin America (Massad and Eyzaguirre 1990) that undertook financial liberalization, albeit to different degrees and under different circumstances.

But this should come as no surprise:

• Even according to the conventional theory, the personal propensity to save from current income depends on the relative strength of two forces pulling in opposite directions, namely the income and substitution effects. Moreover, if current income falls relative to expected future income, a rise in interest rates can be associated with a fall in savings. This often happens when interest rate deregulation occurs during rapid inflation and is accompanied by a macroeconomic tightening that results in a sharp decline in employment and income.

• A large swing in interest rates can lead to consumption of wealth, especially when noninterest income is declining. This is true especially for small savers who can react to increases in interest rates by liquidating real assets and foreign exchange holdings in order to invest in bank deposits in an effort to maintain their standard of living, consuming not only the real component of interest income but also part of its nominal component corresponding to inflation. This tendency is often reinforced by "money illusion" or the inability to distinguish between nominal and real interest incomes, something that tends to be pervasive in the early stages of deregulation. Thus, the initial outcome of deregulation can be to lower household savings, particularly if it is introduced at a time of rapid inflation. For instance in Turkey high deposit rates in the early 1980s allowed a large number of small wealth-holders to dissave.

• The behavior of households may be quite different from that assumed in conventional theory. For instance, they may be targeting a certain level of future income or wealth. Higher interest rates may then lower household savings by making it possible to attain the target with fewer current savings. For instance, in the Republic of Korea and Japan low interest rates combined with high real estate prices have tended to raise household savings (Amsden and Euh 1990).

• Financial liberalization can lower household savings by allowing easier access to credit and relaxing the income constraint on consumption spending. In many countries financial liberalization has, indeed, given rise to a massive growth in consumer loans (such as instalment credits for cars and other durables, credit card lending, etc.). This appears to have been one reason why the household savings rate declined and the debt/income ratio rose in the...

Details zur Ausgabe

• Verlag: Anthem Press
• Erscheinungsdatum: 2014
• Sprache: Englisch
• ISBN 10: 1783082623
• ISBN 13: 9781783082629
• Einband: Taschenbuch
• Anzahl der Seiten: 338
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: preigu; mail@preigu.de; ; Lengericher Landstr. 19; Osnabrück; 49078; Deutschland