An examination of neoclassical and endogenous growth theories and their theoretical implications on pursuing policies of domestic financial liberalisation and global financial harmonisation.
This essay determines what circumstances are required or are desirable when opening up a national economy to liberalise its domestic financial industry and integrate that industry with the rest of the world.
Table of Contents
1. Under what circumstances are domestic financial liberalisation and financial integration with the rest of the world good for growth?
Objectives & Topics
This essay investigates under what specific economic conditions and cyclical timings domestic financial liberalisation and international financial integration foster macroeconomic growth, analyzing the sequencing required to harness foreign capital while preventing systemic vulnerability.
- Comparison of neoclassical (Solow model) and endogenous growth theory perspectives on savings and capital accumulation
- Mechanisms of domestic financial deepening, interest rate ceiling removal, and credit provision
- Risks of capital account openness, external shock vulnerability, and lessons from the 1997 Asian Financial Crisis
- Role of foreign direct investment (FDI) spillovers and domestic institutional readiness
- Optimal policy sequencing: domestic financial sector development prior to full external integration
Excerpt from the Book
The question of circumstance for domestic financial liberalisation and financial integration with the rest of the world hinge, crucially, upon timing.
Not only does the point an economy is at within its own economic cycle have to be considered, but also an economy’s maturity in comparison with the rest of the world. In addition to these considerations, it is also important to look at whether policies toward domestic financial liberalisation should be pursued first and financial integration with the rest of the world second, or vice versa. Laura Alfaro’s et al assertion that foreign direct investment has no direct effect upon an economy’s growth unless financial markets are developed sufficiently, a viewpoint backed by other economists. Indeed, conventional wisdom would suggest that it is wise to put one’s own house in order before becoming involved in global affairs. Whilst Frederic Mishkin does contravene this prevalent opinion however, suggesting that financial globalisation allows for greater financial liberalisation, there is an implication in this argument that there must be a degree of financial liberalisation in the first place.
Development of the financial sector should be a goal for any economy from day zero; whilst not only a facilitating factor in an economy’s growth, it provides a framework of what can broadly be defined as institutions (rules, regulations and bodies) to protect against and mitigate any endogenous and exogenous shocks that an economy may fall foul of – even the most insular of economies are not immune to exogenous shocks in the global financial world. Domestic financial liberalisation should be the policy area tackled before financial integration with the rest of the world in order to minimise any pressures an economy may be under in the financial sector or in foreign exchange markets. Theoretically, financial development can occur at any stage in an economy’s cycle or lifespan; early liberalisation allows for the system to mature sooner and a financial sector heavily regulated by government is unlikely to experience neither much of a boom and bust cycle nor any meaningful rates of growth.
Chapter Summary
1. Under what circumstances are domestic financial liberalisation and financial integration with the rest of the world good for growth?: An analysis of neoclassical and endogenous growth theories alongside macroeconomic evidence demonstrating that domestic financial development must precede well-phased external financial openness.
Keywords
Domestic financial liberalisation, financial integration, financial globalisation, neoclassical growth theory, Solow model, endogenous growth theory, savings ratio, foreign direct investment, financial deepening, Washington Consensus, capital account openness, currency crisis
Frequently Asked Questions
What is the core subject of this paper?
The paper examines the circumstances and timing under which domestic financial deregulation and global financial integration promote sustainable economic growth.
What are the central thematic areas covered?
Key topics include growth theory models, domestic credit market liberalization, capital account liberalization, financial crises, and policy sequencing.
What is the primary objective of the author?
The primary aim is to resolve the debate regarding whether domestic financial market reforms should precede global capital integration to optimize economic growth while mitigating external risks.
What methodology is applied in the analysis?
The work employs a theoretical and empirical literature review, evaluating established neoclassical and endogenous economic growth models against historical economic crises and empirical studies.
What does the main body discuss?
It details the impact of credit expansion on entrepreneurship, evaluates the Washington Consensus, contrasts the benefits of FDI with the dangers of capital flight, and discusses institutional resilience.
Which keywords best represent this work?
Financial liberalisation, financial integration, Solow model, endogenous growth, foreign direct investment, financial deepening, capital mobility.
Why must domestic financial liberalization precede global integration according to the text?
A well-developed domestic financial system creates institutional resilience against external currency and trade shocks, ensuring that imported foreign direct investment can be allocated productively.
What lessons from the 1997 Asian Financial Crisis are highlighted?
The crisis illustrates how premature opening of capital markets and floating foreign exchange can trigger currency collapse and destabilize economies lacking sufficiently robust financial sectors.
- Quote paper
- Alexander Boni (Author), 2010, Under What Circumstances are Domestic Financial Liberalisation and Financial Integration with the Rest of the World Good for Growth, Munich, GRIN Verlag, https://www.grin.com/document/168249
