Under What Circumstances are Domestic Financial Liberalisation and Financial Integration with the Rest of the World Good for Growth


Essay, 2010
7 Pages, Grade: 84

Excerpt

Under what circumstances are domestic financial liberalisation and financial integration with the rest of the world good for growth?

The circumstances of domestic financial liberalisation and financial integration with the rest of the world can refer to either the period of the economic cycle at which they are best implemented; or which of the methods in implementing either of the two economic policies are beneficial for growthǤ For the purposes of this essay, ‘circumstances’ will be assumed to refer to which period of the economic cycle at which they are implemented. It must also be clear what exactly ‘domestic financial liberalisation’ and ‘financial integration with the rest of the world’ mean. And also what they entail for an economy that we can assume, from the question, will be transitioning from a closed, directed economy into an open, free market economy.

Domestic financial liberalisation is understood to entail increasing the availability of consumer credit, reducing or ending levels of ‘directed’ investment and ending official ceilings on interest rates.1 2 Financial integration with the rest of the world is understood to entail an economy’s financial sector to be opened up to investment from foreign investors, which is likely to result in better technical transfer, better financial technical transfer and positive foreign direct investment spill over effects.3 Thus, the question posed seeks to determine at which point in the economic cycle are such measures best introduced in order to increase growth.

Both the neoclassical and endogenous growth theories agree, albeit for different reasons, that an increased savings ratio is good for economic growth.4 5 Whilst the neoclassical theory of growth (or Solow model) proposes that increased savings and investment can only increase growth in the short run, due to diminishing returns to capital,67 the endogenous theory argues that the savings ratio is proportional to growth and that there are no diminishing returns to capital because technical progress is an inherent part of capital.8 9 With the postulations of these two key theories in mind, it is possible to determine under what circumstances domestic financial liberalisation and financial integration with the rest of the world will be beneficial for growth.

[...]


1 Maloney, J. Lecture 4: Finance and Growth 1. February 11th, 2010.

2 Gibson, HǤ Tsakalotos, EǤ “The scope and limits of financial liberalization in developing countries: a critical survey,” Journal of Development Studies. April 1994.

3 Maloney, J. Lecture 4: Finance and Growth 1. February 11th, 2010.

4 Ibid.

5 Gibson, HǤ Tsakalotos, EǤ “The scope and limits of financial liberalization in developing countries: a critical survey,” Journal of Development Studies. April 1994.

6 Maloney, J. Lecture 1: Theory of Growth 1. January 21st, 2010.

7 Weil, D. Economic Growth 2e. (Boston: Pearson Education. 2009).

8 Maloney, J. Lecture 2: Theory of Growth 2. January 28th, 2010.

9 Weil, D. Economic Growth 2e. (Boston: Pearson Education. 2009).

Excerpt out of 7 pages

Details

Title
Under What Circumstances are Domestic Financial Liberalisation and Financial Integration with the Rest of the World Good for Growth
College
University of Exeter  (Business School)
Course
Economics - Growth & Development
Grade
84
Author
Year
2010
Pages
7
Catalog Number
V168249
ISBN (eBook)
9783640851584
File size
674 KB
Language
English
Tags
under, what, circumstances, domestic, financial, liberalisation, integration, rest, world, good, growth
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

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