The causes and impacts of international financial liberalization

The research objective of this dissertation is to answer two questions, namely, what causes financial internationalization in emerging markets and what are the socio-economic impacts of international financial liberalization. The focus of the study is developing countries. The queries have been explored theoretically and empirically. A time-series cross-sectional analysis has been undertaken. The empirical analysis covers forty-four developing countries from 1970 to 1994. In some cases, when a comparison is needed, twenty-one OECD countries are included in the empirical study. By using a sound statistical methodology of causality and intertemporal and cross-national data, a variety of hypotheses selected from contemporary studies are rigorously tested. There are three findings from the dissertation regarding the first question (why countries internationalize their financial system). First, the causes of financial internationalization could be evolutionary or revolutionary. The evolutionary cause is the economic interdependence and particularly financial integration among nations. The revolutionary determinant of liberalization is the payment crisis in emerging markets. Second, the empirical studies support the simultaneity or endogeneity view of policy or policy changes. Supported by empirical evidence, domestic and international financial liberalization are mutually reinforcing and endogenous to each other. Finally, structural factors do affect the level of financial openness. The size of the economy significantly influences the level of financial openness in emerging markets. Political structure also makes difference. A responsible, stable government is associated with the policies promoting international financial liberalization. The major finding with respect to the second question (i.e., what are the impacts of international financial liberalization) is that, supported by empirical evidences, financial internationalization is beneficial for developing countries. International financial liberalization imposes a disciplinary effect on government spending, and it promotes economic growth. A more important finding is that international financial liberalization has no impact on the likelihood of domestic banking crisis. For policy makers pondering the pros and cons of international financial liberalization, the policy implication is that a liberalization of capital account will not increase financial fragility of domestic banks.