The Economic and Social Effects of Financial Liberalization

E c o n o m i c

& S o c i a l

DESA Working Paper No. 4

A f f a i r s

ST/ESA/2005/DWP/4 October 2005

The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries

Jayati Ghosh

Abstract

This paper considers the main elements of the standard pattern of financial liberalization that has become widely prevalent in developing countries. The theoretical arguments in favour of such liberalization are considered and critiqued, and the political economy of such measures is discussed. The problems for developing countries, with respect to financial fragility and the greater propensity to crisis, as well as the negative deflationary and developmental effects, are discussed. It is concluded that there is a strong case for developing countries to ensure that their own financial systems are adequately regulated with respect to their own specific requirements. JEL Classification: F41 (Open Economy Macroeconomics); F43 (Economic Growth of Open Economies); G15 (International Financial Markets). Keywords: financial liberalization, development banking, financial fragility, financial crisis, deflation.

Jayati Ghosh is Professor and Chairperson of the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, India. She has published widely in the areas of development, employment generation, international economic issues and gender and macroeconomics. She is currently the (honorary) Executive Secretary of International Development Economics Associates (IDEAs) a South-based international network promoting heterodox development economics.

Contents

The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries ................................................................. The nature of financial liberalization ................................................................................ The theoretical arguments for financial liberalization...