A Study On The Financial Liberalization In Israel

Since Mckinnon and Edward Shaw put forward the famous theory of Financial Repression and Financial deepening in early 1970s, Financial Liberalization has been an international trend. Israel has carried out two financial liberalization reforms since the establishment of nation in 1948. The financial liberalization in 1977 not only led to a deterioration in the current account, but also caused a severe inflation. Financial liberalization in 1977 ended in failure. The second financial liberalization which began in the mid 1980s not only improved the domestic macroeconomic environment and the efficiency of financial markets, but also greatly increased the openness of the economy, making the Israeli economy increasingly integrate into the global markets. The second financial liberalization has achieved remarkable success. A study on the financial liberalization in Israel and summing up their experience and lessons will have a positive practical significance for the process of financial reform in China.This paper is divided into five chapters.Chapter 1 is Introduction. It includes the theoretical and practical significance of this subject ,the relevant research of scholars from home and broad ,the structure of this paper ,the main viewpoints and the author's creativity .Chapter 2 is the theoretical basis of the paper. It mainly outlines the emergence and development of the theory of the financial liberalization. In this chapter, the paper first gives a brief introduction of McKinnon and Shaw's theory of financial repression and financial deepening, then focuses on the latest developments of the theory of financial liberalization after 1990s.The developments can be seen in the following three aspects.First, the endogenous growth theory was introduced into the theoretical analysis of financial liberalization. People began to pay attention to the study of financial intermediation and financial market, and put forward the so-called "second generation expansion model" or "Endogenous Monetary Growth Model".Second, the relationship between financial liberalization, financial fragility, financial risks and the financial crisis has gradually become the focus of theoretical research of financial liberalization.Third, people began to study the initial conditions for the financial liberalization ,the pace and the sequence of the liberalization process and the corresponding financial regulatory issues.Chapter 3 studies the financial liberalization in 1977 in israel. It includes the characteristics of the financial system before liberalization , the main measures, the macroeconomic impact of the liberalization on the israelie economy and an analysis of the reason for the failure.Before the financial liberalization, Israel's banking system, capital markets and foreign exchange markets were highly regulated by the government. In October 1977, the new Israeli government directly started reforms in the foreign exchange market . The current account, exchange rate regime and capital account achieved completely liberalization in a very short period of time. The sudden capital account liberalization led to excessive capital inflows, which caused a rapid expansion of aggregate demand.Prices rised quickly,and it eventually evolved into hyper-inflation. Meanwhile, the real exchange rate appreciation led to a deterioration of the current account. Israel government eventually withdrew from the reforms,and re-strengthened financial markets. The last part of this chapter analyzes the reasons for the failure of financial liberalization in 1977. These reasons included inadequate macroeconomic conditions, the underdevelopment of the local capital markets and the inadequate information on capital flows.Chapter 4 studies the second financial liberalization in Israel which began from the mid-1980s. The financial liberalization involved Israel's banking system, capital markets, money market ,foreign exchange market as well as many other fields. And it took a gradualist reform model,which lasted more than 20 years. The financial liberalization has achieved positive results, which could mainly be seen in the following 4 points. First,Inflation went down and The benchmark interest rates was lowered.Second, Foreign exchange reserves increased and fluctuation in exchange rates has become more stable.Third, Banking sector runs well,and Securities market develops rapidly.Fourth, Israel has seen a growing scale of external assets and liabilities,in which the proportion of domestic non-financial corporate sector is increased. This paper summarizes four reasons for the success of the second financial liberalization. First, the second financial liberalization went on with a better macroeconomic environment. Second, compared with the radical financial liberalization in 1977, the second one adopted a gradual reform model,and paid great attention to the sequence of the liberalization process.Third, the second financial liberalization involved many areas, especially domestic banking system and capital market ,which therefore are developed greatly.Fourth,during the financial liberalization process, capital flows was under close supervision by Israel government.Chapter 5 gives a full-text summary,and then puts forward four pieces of advices for the financial liberalization in China.First, China's financial liberalization should be carried out slowly and gradually in a stable macroeconomic background .Second, Prior to opening up domestic financial markets,China should first start the reforms in the domestic banking system and capital market in order to develop domestic money market and capital market.Third, during the liberalization process of capital account,China should attach importance to the rational sequence of liberalization.Fourth, during the financial liberalization process,China should establish a comprehensive set of information monitoring network, strengthen financial supervision, and develop an early warning model of China's financial security.