Analysis Of Effects Of Liberalization Of Trade In Financial Services

Voluntarily or forced to, the financial services industry in most countries have become part of the multi-lateral global trade system and are moving towards liberalization. Given that the development stage of the economy and the financial services sector are very different cross nations, what is the implication of this reality for establishing an efficient and stable financial system? What are the effects on the development of domestic financial system and eventually on economy growth? These are issues that this thesis examines.The financial industries in the advanced economies have the absolute leading edge in the world. Among them, the United States, Britain, Canada and Germany have been advocating for further liberalisation and have allowed more market access. However, not all advanced countries have voluntarily adopted such policies. On the other hand, the financial services sector in developing countries/regions is often much less developed. Singapore, Thailand, Mexico, Columbia and Chile have actively promoted financial liberalization, even though they do not have the competitive edge in the industry. Most developing economies are forced to join the negotiation and liberalization process due to various pressures. This reality shows that countries approach liberalization of trade in financial services in different ways. There are direct trade benefits from liberalization. More importantly, though, governments tend to regard increasing foreign access to domestic financial market as part of their economic development strategy. This is because the financial services sector is closely related to other industries in the economy. It has a strategic role part in the national economy and its economic function is irreplaceable. Ultimately, the economic impact of liberalization of trade in financial services falls on economic growth. This is transmitted through its effects on the efficiency and stability of the financial system. Last but not least, this transmission mechanism does not work automatically. Instead, it requires appropriate government intervention.Based on this analysis, this thesis is set against the background of liberalization of trade in financial services. The starting point is the economic functions of financial services, while the theme is the efficiency and stability of the financial system. I analyse the economic mechanisms and impact of an open financial market on the development of financial system and through which on economic growth. I also examine the conditions needed for these mechanisms to function well.The analysis proceeds as follows. I first define the concept of trade in financial services and clarify its function and nature. Second, I set up the reality background by arguing that liberalization of trade in financial services is inevitable, based on both economic theory and empirical evidences. Third, I analyse the economic impact of liberalization of trade in financial, starting from the immediate effects on the efficiently and stability of the financial sector, followed by those effects eventually on economic growth. Fourth, I use market failure theory to argue for policies that can ensure these economic benefits to be realised, from the perspective of improving efficiency and stability of the financial system. Finally, I offer a brief discussion of these policies in the Chinese context, on the basis of the particular development stage of China.This thesis is composed of three parts that are divided into seven chapters. The first part is the foundation of the thesis and includes Chapter 1 and 2.Chapter 1 is Introduction. It explains the background and the motivation of this study. Starts with a literature review that summarises the contribution and the gap of relevant work, it provides the analytical angle of this thesis. I then discuss the logical sequence of the argument. The chapter ends with a list of contents of the thesis, key innovations and suggested areas for further study.Chapter 2 is the starting point of the analysis. It focuses on what is liberalization of trade in financial services and why it should be implemented. I define the scope of financial services sector and explain its characteristics and nature, based on a brief discussion of its economic function. This lays the foundation for the analysis of the economic implications of financial services. I argue that liberalization of trade in financial services is an inevitable outcome of financial and trade development in the era of globalisation. This is based on economic theory and empirical evidences. The Comparative Advantage and New Trade theory are the theoretical foundation for the emergence and development of trade in financial services. They are also useful for examining various factors that influence the development of the financial services sector, from supply and demand side. The global economy is growing and is composed of increasing shares of productions, trade and investment that expand cross the borders. This trend demands financial services liberalization. In the meantime, it also offers the necessary condition for such liberalization to occur. liberalization of trade in financial services is the natural outcome of economic development, as well as the policy choice of governments based on cost-benefit analysis. Finally, this chapter evaluates the current level of liberalization in various economies by looking at their current practises and policy measures, which is used to compare to the situation in China.The second part is the analytical body of the thesis. With the precondition that it is inevitable to open the domestic financial market, this part answers the question of'what are the benefits of liberalization?', that is, what are the positive economic impacts of financial services liberalization. This part includes Chapter 3 to 5. Given that liberalization is inevitable, it is important to understand its pros and cons to help choosing the appropriate policies. This is not an easy task. There are multiple dimensions of the economic influences of liberalization of trade in financial services , and each dimension may interact with each other. To make the analysis easy to follow, the approach is from the immediate to the ultimate impact. The immediate impact refers to those that fall on the financial system directly, including those on economic efficiency and stability of the system. The ultimate impact includes that on economic growth.Chapter 3 focuses on the analysis of the impact of liberalization of trade in financial services on economic efficiency of the financial sector. This is one of the immediate impacts of liberalization. It starts from the function of the financial system, defining efficiency as operational and allocation efficiency. It then discusses factors that affect this efficiency. This is used to evaluate the efficiency of financial systems in various countries, which drives the motivation for further analysing the impact of financial services on the efficiency of the whole financial system. This is discussed from the aspects of the competition environment of the financial system, operational efficiency and capital allocation efficiency. The conclusion of this chapter is: in general, liberalization of trade in financial services can increase the efficiency of a country's financial system through more market competition. The magnitude of the benefits is affected by the competitiveness of domestic financial services industry, the stage of economic development, as well as institutions such as the legal system.Chapter 4 analyses the influence of liberalization of trade in financial services on the stability of financial system. This is the second immediate impact. Financial crises that accompany liberalization of trade in financial services demonstrate that liberalization of trade in financial services is fundamentally different from the liberalization of general goods and services trade. Therefore, it is essential to examine this impact and understand its nature. I first define financial stability and look at its characteristics. I then argue that the key factor that contributes to the instability of financial system is its intrinsic fragility. Finally, I discuss the impact of liberalization of trade in financial services on financial stability from three aspects: international capital mobility, access to domestic market by foreign banks and financial supervision. The conclusion is: liberalization of trade in financial services does not cause financial crises. It can either improve or exacerbate the fragility of the financial system. When the financial system is not mature, and the institutional foundation of the financial market is not well-established, liberalization of trade in financial services often becomes the'catalyst'of financial crises.Chapter 5 examines the effects of liberalization of trade in financial services on economic growth, which is the ultimate impact of liberalization. I first provide a theoretical model, This model takes into account the openness and competitiveness of the financial market. It establishes a causal relationship between the performance of financial firms and economic growth.investigate the linkages between financial services industry and the other sectors of the economy. Second, based on the economic function of financial market, I provide detailed analysis of the transmission mechanism between of liberalization of trade in financial services and faster economic growth. Finally, Using empirical data, I demonstrate the dual impact of financial sector on economic growth.I argue that in an ideal situation when liberalization of trade in financial services increases the efficiency and stability of domestic financial system, it has a definite, positive effect on economic growth. The conclusion of this chapter is: in the ideal situation, the growth impact of financial services liberalization works through financial the development channel, the industry channel, the direct investment channel and the international trade channel.The third part is the extension of the second part. In answering the questions of"what',"why"and"the consequences of"financial services liberalization, I reach the conclusion that the economic impact of liberalization is fully realised only in the ideal situation. So the question for this part is"how"to ensure the positive economic effects of financial liberalization to occur. This is answered in Chapter 6.Chapter 6 analyses the sufficient condition for an'ideal'liberalization of trade in financial services. In the liberalization process, the role of government is rather controversial. In this chapter, I start from market failure theory. I argue that there are incomplete competition, externality and missing markets in financial system, which lead to incomplete market. This is the theoretical foundation for government intervention. However, most governments in less developed economies face the dilemma of economic efficiency and stability of the financial system. Stable and efficient operation of financial system is both the requirement and the outcome of financial maturity. Therefore, it is also the necessary condition for the complete realisation of the positive economic impact of financial liberalisation. This chapter discusses policy options to ensure financial stability from the prospect of increasing efficiency and reinforcing stability. The conclusion is: in the process of liberalization of trade in financial services, neither"excess"nor"missing"government policy is acceptable. The government should adopt appropriate measures to ensure the realisation of the positive economic impact of liberalization of trade in financial services. The ultimate policy goal is to use financial development to promote economic growth, and the core of the policy id to improve efficiency and stability of the financial system.Chapter 7 is a conclusion part.