The effects of financial liberalization on economic growth case study for ASEAN countries by using KAOPEN index

Problem statements

Recentyearsh a v e e m e r g e d t h e c o n c e r n i n t h e i s s u e a b o u t g l o b a l i z a t i o n , w h i c h includedinternationaleconomicintegrationandfinancialglobalizationinacr osscountries,hasscholarlyinstigatedbymanydescriptionsandanalysesofresearchers.A c c o r di n g toMckinnon(1973)andShaw(1973),assertedthattheimportantroleso ffin ancialareessentialfortechnologicalinnovationandeconomic development.A s strongevidencesinmostresearch,thereiswithoutdoubtinthissaying.However, thestudyoffinancialliberalizationgrowthnexushasreceivedoppositeo p i n i o n s , whilethetendencytowardtheworldeconomicintegrationrequireslocalmark eto p e n n e s s i n c l u d i n g f i n a n c i a l m a r k e t , a n d s o m e a d j u s t m e n t s i n f i n a n c i a l r u l e s , thusprovidingthegoingdebateaboutwhetherpositiveor negativeeffectoff i n a n c i a l liberalizationoneconomicgrowth.

According to Sachs and Warner (1995) and Rodrik (2000), advancements in technology and economic institutions have led to a narrowing gap between countries, fostering increased international trade and investment This trend reduces costs for consumers and producers while enhancing the process of international economic integration A prime example of this integration is the World Trade Organization (WTO), established by an agreement among over 120 economies Similarly, the International Monetary Fund (IMF) now boasts near-universal membership, with countries committing to adhere to fundamental principles of currency convertibility.

G D P a n d t h e h i g h v a l u e o f internationaltrade,China’scurrencywhichnamedC hineserenminbi(RMB)havemetthecriteria forSpecialDrawingRight(SDR)ba sketasthedecidedofIMF’sE x e c u t i v e boardinNovember2015,andRMBwil lbecometheconvertiblec u r r e n c y OnOctober1,2016RMBwouldjointheSD Rbasket,togetherwiththefo ur o t h e r g l o b a l c u r r e n c i e s o f t r a d e I n t h e S

D R basketw i l l bei n c l u d i n g U S dollar:4 1 7 3 p e r c e n t , E u r o : 3 0 9 3 p e r c e n t , C h i n e s e r e n m i n b i ; 1 0 9 2 p e r c e n t , Japaneseyen:8.33percent,Poundsterling:8.09percentrespectively.Thefirsta d v a n t a g e offreelyconvertibleRMBisthatitisveryinexpensivetobuyandsell,sot hatcouldbereducethespreadcost(thedifferentpriceinbuyandsell)ofbank.Atsmaller scale,therearevaryinglevelsofeconomicintegration,includingp r e f e r e n t i a l b e t w e e n memberc o u n t r i e s , t h e i n t e g r a t i o n b e t w e e n c o u n t r i e s i n the samecontinent,regionsuchasintheEuropehaveestablishedtheOrganizationforEc onomicCo- operationandDevelopment(OECD),EuropeanUnion(EU),andthed e v e l o p m e n t ofthisisEurozone.IntheAsiatherearetheinstitutionsthatcanbecounteda s T h e

P a c i f i c EconomicC o o p e r a t i o n ( A P E C ) , t h e A s s o c i a t i o n o f S o u t h e a s t AsianNations(ASEAN).Thenewone,ASEANEconomicCommunity( A E C ) h asestablished in theDecember2015, thatincluding Viet Nam andotherA S

The ASEAN Economic Community (AEC) aims to establish an economic community based on the principles of the European Union, focusing on four key elements: a single market and production base, a competitive economic region, equitable economic development, and ASEAN's integration into the global economy The goal is to transform the ASEAN market into a unified space that promotes free trade of goods and services across the region, enhancing competition in production and export activities To ensure equitable development, it is crucial for individuals and firms to participate in the AEC process Additionally, ASEAN's strategic position in the global supply chain presents opportunities for trade development with major economies, fostering new business prospects The core principles of the AEC include the free flow of goods, services, investment, capital, and skilled labor ASEAN has successfully reduced trade duties, with countries like Brunei, Indonesia, Malaysia, the Philippines, and Singapore lowering tariffs to 0%, while Cambodia, Lao PDR, Myanmar, and Vietnam have also achieved similar reductions.

5%.M o r e o v e r , t o e n c o u r a g i n g i n v e s t m e n t , t h e i n v e s t m e n t en v i r o n m e n t h a s b u i l t i n a p r i n c i p l e t h a t en s u r i n g t h e liberalizationandprotectioninves tmentofcrossbordercountries.Inwhich,applyt h e b e s t p r a c t i c e s f o r treatmento f f o r e i g n i n v e s t o r s a n d i n v e s t m e n t I n a d d i t i o n , i m p l e m e n t i n g thefree flowofcapital,stockexchangesfrommemberareworking togethertofirststepest ablishingtheASEANExchanges.ThisistheaimofpromotingASEANcapitalmarkets andcreatingmoreinvestmentopportunitiesin theregion.

The integration process necessitates that Vietnam and other countries open their local markets, particularly domestic financial markets Current government policies aimed at market control face criticism for potentially hindering the efficient functioning and development of financial institutions Professor McKinnon (1973) noted that imperfect capital markets significantly obstruct the growth of developing nations due to fragmented economies and policy measures, which impede effective resource mobilization and allocation Despite ASEAN, including Vietnam, having abundant natural resources and advantages in the global supply chain, the region has not developed as expected, prompting a need to examine the impact of financial liberalization on economic growth within ASEAN countries Recently, financial liberalization has become a focal point for scholars and policymakers, with numerous studies, such as those by Quinn (1997), Klein & Olivei (1999), and others, highlighting the positive correlation between financial liberalization and economic growth.

(2010),amongo t h e r s Ontheotherhand,theotherresearchhavenotsupportedforth ehypothesis thatliberalizationspurgrowth,thatarethestudiesofRodrik(1998),Kraay(1998),Stigl itz(2000)andmaybemanyotherone.

Forthisreason,thisstudyisconductedtoanalyzetherelationshipbetweenfinancialliberalizat ionandeconomicgrowthinASEANcountries,basedonthemodelofB e k a e r t eta l

This study focuses on the impact of financial liberalization on economic growth in ASEAN countries, particularly Vietnam, a member of the ASEAN Economic Community (AEC) As the AEC influences Vietnam's economy, it is crucial to understand how financial liberalization pressures local financial markets and strengthens the financial system Given the limited research on this region, this study aims to explore the benefits and unexpected effects of financial liberalization on economic growth from 1990 to 2013 The expectation is to find positive evidence linking financial liberalization to economic growth, thereby promoting the integration process within ASEAN.

Researchobjectives

Researchquestions

Thiss t u d y t e n d s t o f i n d o u t t h e impacto f f i n a n c i a l l i b e r a l i z a t i o n o n economicg r o w t h , bya p p l y i n g t h e q u a n t i t a t i v e r e s e a r c h t o a p a n e l d a t a o f t h e c o u n t r i e s o f S o u th east Asia.Thisstudyaimstoaddresstwomainquestions:

- Howdoe sf in anc ial l i b e r a l i z a t i o n af fec t economicg r o w t h o f c r o s s countries?

Theresearchjustfocusesonsmallgroupofcountries,theASEANmembercountries ,w h e r e h a v e e s t a b l i s h e d a n EconomicC o m m u n i t y ( A E C ) a s h o r t t i m e a g o Asdemandforopeningfinancialmarketistheoneofthefivecoreprincipleso f theASEANsinglemarketandproductionbaseinmembercountries,thef i n a n c i a l liberalizationprocessisexpectedtobeimplementedintheASEANcountries;in cl ud in gVietNam.Th eA SE AN is chosenint he samplebecause the l a c k o f f i n a n c i a l l i b e r a l i z a t i o n s t u d i e s f o c u s o n A S E A N c o u n t r i e s I n a d d i t i o n , b e c au se VietNamisonememberofAEC,theneedisclarifyingthecorrel ationoff i n a n c i a l l i b e r a l i z a t i o n a n d e c o n o m i c g r o w t h b e t w e e n c r o s s m e m b e r c o u n t r i e s o f A E C

This paper is structured into five main chapters The first chapter serves as an introduction, while chapter two provides a critical literature review on economic growth, financial development, and the impacts of financial liberalization on economic growth Chapter three details the regression model and research methodology, outlining the empirical model used to assess the effects of financial liberalization on economic growth In chapter four, an overview of economic growth and financial liberalization in ASEAN countries is presented, along with descriptive statistics of the sample and a discussion of the study's results Finally, chapter five summarizes the main findings, addresses limitations, and suggests directions for further research.

Thischapterintroduces threemainparts.Thefirst sectionprovides definiti onsoff i n an ci a l liberalizationandreviewstheoreticalbackgroundsaboutther oleoff in an c i a l l i b e r a l i z a t i o n i n e c o n o m i c g r o w t h T h e s e c o n d s e c t i o n s u m m a r i z e s p reviou s e m p i r i c a l r e s e a r c h e s B a s e d o n r e l e v a n t c o n t e n t s , t h e t h i r d s e c t i o n w i l l d ep i ct theconstructionofconceptualframeworkforthisst udy.

Economic growth refers to the positive change in the production of goods and services within a country over a specific period, often measured by Gross Domestic Product (GDP) and Gross National Product (GNP) Nominal GDP includes inflation, while real GDP adjusts for inflation, providing a clearer picture of economic performance To compare the economic growth of different countries, GDP or GNP per capita is utilized, accounting for population differences Ultimately, economic growth is often viewed as an enhancement of the overall quality of life.

Thisisnotonlya s anincreaseinproductivecapacitybutalsoasanenhancementthequa lityoflifeto thepeopleofthateconomy.Todepicttheissueofeconomicgrowth,b asingontheneoclassical,theexogenousgrowththeory,endogenousgrowththeoryare d e v e l o p e d

AccordingtoBarro(1991),Howitt(1999),inneoclassicalgrowththeory,economicg r o w th isgenerallyrelatedwithtechnologicalchanges.Solow-

Swangrowthmodel( e x o g e n o u s growth)reflectstherelationshipofoutputandca pital,labor,andtechnology.Economicgrowthwillexertifthereisanincreaseincapitalre lativetol a b o r u n t i l t h e e c o n o m y o b t a i n s t h e s t e a d y s t a t e A t t h e s t e a d y s t a t e , d e s p i t e a n increaseincapitalandlabor,economicgrowthwillbeunchanged.Atthattimethetechnolo gychangeplaysthekeyrolefortheeconomytoovercomethatsteadystate.Endogenous grow th theory

Endogenous growth theory, rooted in neoclassical economics, seeks to explain long-term economic growth driven by activities that generate new technological knowledge This theory, particularly highlighted by the "Schumpeterian" perspective on innovation, posits that growth is determined by factors within the economic system rather than external influences It emphasizes the importance of opportunities and incentives for creating technological advancements A key model within this framework is the AK model, which illustrates growth through a constant returns to scale production function, representing the foundational version of endogenous growth theory derived from production functions.

The new production function Y = AK demonstrates that the marginal productivity of capital (A) remains constant as the capital stock increases, leading to the equation y = Ak when divided by labor (L) While this model assumes constant returns to scale, it does not explicitly address diminishing returns The AK theory emphasizes capital as a crucial element that directly enhances production, resulting in a linear increase in output with rising capital stock Furthermore, the theory suggests that an economy's long-run growth rate is contingent upon its saving rate; higher saving rates correlate with increased growth rates, while higher population growth rates can result in lower income per capita.

AghionandHowitt(1998)thinkthattherearesomedifferentbetweenneoclassicalmo delandendogenousgrowththeory thatinendogenousgrowththeory thegrowthp e r c a p i t a l c a n c o n t i n u e w i t h o u t b a s i n g one x o g e n o u s t e c h n o l o g y c h a n g e s , a n d t he r e isnoconvergenceofincome,sothatthepoorc ountrieswillnotnecessarilyg r o w t h fasterthanrichcountries.However,likewi thSolowmodel,thekeyroleofaccu mu lati on ofproductionfactorsandtheincrea singinproductivityinthegrowingprocessarealsoemphasizedinendogenousgrowthth eory.

Inthisstudybothoftheoriesareemployedtoexplainthecorrelationofthevariablesi n r e g r e s s i o n model,t h e f a c t o r e f f e c t i n g g r o w t h i n t h e economy.F o r ex ample,t he co n v e r g e n ce o f incomec o u l d b e i n t e r p r e t e d byneoclassical theory ,a n d thetotalfactorproductivityincreasingisexplainedbyAKmodel,

Financialdevelopment isdefinedasanimprovementinthequality,quantityandthee f f i c i e n c y o f f i n a n c i a l s ystem.T h i s p r o c e s s i n v o l v e s t h e c o m b i n a t i o n o f m a n y activitiesand institutions.

Beck et al.(2000) agree with Schumpeterianview offinanceanddevelopment:thath i g h e r l e v e l o f f i n a n c i a l d e v e l o p m e n t s p u r economicg r o w t h bya f f e c t i n g t o t a l f acto r p r o d u c t i v i t y g r o w t h A c c o r d i n g t o L e v i n e ( 2 0 0 5 ) , f i n a n c i a l d e v e l o p m e n t h a p p e n s whenfinancialinstruments,marketsandintermediariesareimprovedbetter,the ntheyaffecttheinformation,enforcementandtransactioncosts.

Intheliteraturefinancialdevelopmentspurgrowthbythewellfunctioningfinancials y s t e m t hatcouldbebrieflypresentedthroughtwochannels:increaseinfinanciald e e p e n i n g thatraiseinvestment,andefficientresourceallocationwhichenhancetheproducti vitygrowthup

Financialdeepening isdefined asthe increasingthe ratiooffinancialassetstoGDPth at meansi n c r e a s i n g p r o v i d i n g f i n a n c i a l s e r v i c e s t o a l l l e v e l s o f a society.T h i s c o u l d encouragesaving,morecapitalaccumulating

Inaddition,financial d e v e l o p m e n t playsanim po rt an t roleinraisingprodu ctivity g r o w t h Assavingratesincreasing,saverscouldinvestinthefinancialsy stemandg a i n p r o f i t s Whentheyd o s o , c a p i t a l r u n s i n t o t h e f i n a n c i a l ma rkets,financiali n t e r m e d i a r i e s wherearewillinglytoscreening,selectingandmo nitoringpotentialusersofcapital.Afterthat,thegoodprojectswillbefinancebyt heoutsidecapitalan dt h e u n p r o d u c t i v e v e n t u r e s f a i l t o b e f i n a n c e d

T h i s p o i n t o u t t h a t f i n a n c i a l marketsa n d f i n a n c ia l i n t e r m e d i a r i e s co n tr ib ut e tod i s t r i b u t e r e s o u r c e s e ff ic ien tl y A t theendofthisprocess,productivityi sincreasinginthewholeeconomy.

(2000)financialdevelopment couldbemeas ur ed bythesize,theactivity,andthee fficiencyofthefinancialsector.

Tomeasurethesizeoffinancialsector,the“liquidliabilitiesratio”indicatorisused.T h i s i s formedbythe currencyplus demand and interest bearing liabilities financiali n t e r m e d i a r i e s andnon- bankfinancialintermediariesdividedbyGDP(Becketal.,2000);

(McKinnon,1973).Thisindicatorcouldalsobeusedasp ro xy forfinancialdeepenings inceitcoversalltypesoffinancialinstitutions.

Theactivityoffinancialsectorcouldbemeasurebytheroleofcommercial ban kcomparedwithcentralbankortheimportanceofbankintheallocationofsociety’ssavin gs.“Commercial-

Centralbankassets”indicatorwhichformedbytheratioofa s s e t ofdepositmoneyba nksdividedbythesumofassetsofdepositmoneybanksan d centralbankassets.

The "ratio of credit to the private sector" serves as a key indicator for assessing the financial sector's activity and efficiency in resource allocation This metric is more advantageous than traditional monetary aggregates, as it provides a clearer picture of the actual funds available to the private sector A higher ratio of domestic credit as a percentage of GDP typically correlates with increased domestic investment and a more developed financial system Thus, domestic credit to the private sector can effectively act as a proxy for private credit (DeGregorio & Guidotti, 1995).

Financialdeepening isdefined asthe increasingthe ratiooffinancial assetstoGDPth at meansincreasingprovidingfinancialservicestoalllevelsofasoci ety.Thisismeasuredbyformula:

𝐺 𝑃�𝑃 WhereM2ismeasureo f t h e m o n e y supplyw h i c h i n c l u d i n g cash,c h e c k i n g , a n d savingaccount.

Financiald e e p e n i n g g e n e r a l l y us ed top r e s e n t t h e meaningo f i n c r e a s i n g r a t i o o f m o n ey supplytoGDP,thusexpressingtheliquidmoney.Inthetraditionmeanin g,h i g h e r liquidmoneyleadstomoreinvestment,moreopportunitiesandthenhig hereconomicgrowth.Asfinancialservicesareavailabletoindividualandhousehold s,t h e basicservicessuchashealth,educationbecomeeasilyt o beaccessedbycommonp eople,thusprovidinganimportantboosttopovertyreduction.

AccordingtoKingandLevine(1993)financialdeepeningisoneoffourindicatorst o measurefinancialdevelopmentofacountry.Intheirstudy,amongmanyotherst udies,financialdeepeninghasasignificantpositiveeffectoneconomicgrowth.

Thegovernmentpoliciesthatfocusedonrestrictingandcontrollingfinancialma rketshavebeenknowninliteratureasfinancialrepression.Manygovernments feelthemselvestheneedtoimpose manytypeofrestrictions whichareclassifie di n t o f o u r c a t e g o r i e s byt h e I M F ’ sA n n u a l R e p o r t o n E x c h a n g e A r r a n g e m e n t a n d Excha ng e Restrictions(AREAER)

Since the early 1970s, scholars have raised concerns about government policies aimed at controlling financial markets, often viewing these interventions as detrimental to efficient functioning and the development of financial institutions McKinnon (1973) and Shaw (1973) critiqued restrictive government policies in the financial sector, arguing that such measures distort domestic markets Governments often feel compelled to intervene in finance to mobilize support for activities that they believe will bolster the domestic economy These restrictive policies may stem from fears of dependence on foreign capital, the need to support state-owned firms, or efforts to prevent domestic investors from seeking higher returns in international markets.

QuinnandToyoda(2007)suggestthatthroughthe1980s manydevelopingc o u n t r i e s c l e a r l y r e f u s e t h e m o d e l o f f i n a n c i a l o p e n n e s s p r o p o s e d byd e v e l o p e d countriesbecausethefearofdependencyinterpretationofmodernc apitalism.Ifac o u n t r y were t o a c c e p t t h e e x p o r t o f f o r e i g n c a p i t a l , its e t s i t s e l f u p f o r , a t b e s t , economicc o l o n i a l i s m Somec o u n t r i e s , h e n c e , f o r b i d i n t e r n a t i o n a l c a p i t a l T h i s standpointshowst h a t d e v e l o p i n g c o u n t r i e s s h o u l d b e t t e r k e e p i s o l a t e formr i c h c o u n t r i e s whoexploitpoor countrieswascentraltodevelopedcountrywealthanddevelopi ng countrypove rty.Inthedevelopmentpointofview,developingnationss h o u l d u n d e r t a k e i m p o r t s u b s t i t u t i o n i n d u s t r i a l i z a t i o n w h i c h a d v o c a t e s r e p l a c i n g f o r e i g n importswithdomesticproductioninordertoimprovetheirtermsoftrade, w h i c h requirespartialfinancialclosure.

Financialliberalizationisaverybroadtermthatusuallyhasthemeaningthatfewergovern mentr e g u l a t i o n s a n d r e s t r i c t i o n s i n t h e f i n a n c i a l m a r k e t Ino t h e r w o r d s , liberalizationreferstoderegulationorremovingofcontrols.FollowingK u n t an d

According to Levine (1996), the deregulation of interest rates and the loosening of entry policies have facilitated significant financial development, particularly in developing countries where government policies previously suppressed economic management While financial liberalization was implemented in some nations, it often stemmed from the underperformance of lending institutions and instruments, prompting further reforms Over the past two decades, many developing countries have reformed their domestic financial markets to meet both domestic and international development needs In essence, financial liberalization involves the "opening up" of economies to foreign capital and investments, allowing for the free movement of money in and out of a country.

(2004)summarizethatfinancialliberalizationenhancestheefficiencyin resourceal location,makesriskdiversificationmoreeasilyavailabletothefirmsa n d i n v e s t o r s , s p e e d s u p p r o c e s s o f f i n a n c i a l d e v e l o p m e n t , h e n c e i m p r o v i n g t h e economicgrowth.

Various indicators have been developed to measure capital account openness for most countries worldwide, as noted by Cline (2010) and further elaborated by Cline (2011) These indicators are categorized into three groups: de jure, de facto, and hybrid indicators, with hybrid indicators combining elements of both de jure and de facto measures Most of these metrics are derived from the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) published by the International Monetary Fund (IMF) Additionally, specific indicators have been created to assess the degree of financial liberalization, including "Share" from AREAER, "CAPITAL" by Quinn (1997), "KAOPEN" by Chinn and Ito (2007), and "KA" by Schindler (2009).

Int h i s study,“ K A O P E N ” i n d i c a t o r i s c h o s e n t o p r o x y f o r financialo p e n n e s s , b e c a u s e i t c o v e r s a p e r i o d timef r o m 1 9 7 0 t o 2 0 1 3 a n d i s a v a i l a b l e i n i n t e r n e t WhileQuinn’sCAPITALdatastopattheyear2004,toooldt ouse.Usuallyinther e g r e s s i o n estimation,Quinn’sCAPITALindicatorgivestheresult moresignificantt h an KAOPENindicator.However,itisnotupdatedinrecentyears,sotha titisnotchosen.KAhasnodataforLaoPDRandCambodia,anditjustcoverfrom

2.1.2.4 FinancialLiberalizationandEconomicGrowthTh e mainstream point of view

Ing e n e r a l , manys c h o l a r s h a v e a g r e e d w i t h t h e p e r s p e c t i v e t h a t f i n a n c i a l liberalizationspurseconomicgrowththroughseveralchannels:firstly,strengthen inglocalfinancialmarket,sothatleadsmoreefficientinallocationofr e s o u r c e s , more foreigninvestment, more savingrate,providing opportunities forr i s k div ersification.Secondly, helptodevelopfinancial systems.Thirdly,pickingu p thevolumeoftradeandservice,andhencerampupthecompetitiveabilitiesoflocal country.

Recentyears,agreatnumberofdescriptionsandanalyseshavebeenconductedtoc l a r i f y therelationshipbetweenfinancialliberalizationandeconomicgrowth.Intheliteratur e,asthemainstreampointofviewisthatfinancialliberalizationhast h e p o s i t i v e r e l a t i o n s h i p w i t h e c o n o m i c g r o w t h T h e f i r s t timem e n t i o n i n g o f lib eralizationispresentedbyMcKinnon( 1 9 7 3 ) a n d S h a w ( 1 9 7 3 ) B o t h a u t h o r s c r i t i c a l l y focusonfinancialrepression,foritwasknownas restrictingandco ntrollinginfinancialmarkets.Thispresentedbytheinterventionofgovernmentsuc hasenforcementtheinterestrateceilings,directedcreditandsubsidiestobanks.McKinnon(19

The effectiveness of resource mobilization and reallocation is hindered by weaknesses in economic institutions and policy measures Authors argue that firms face financial constraints when relying solely on internal financing, advocating for a perfect competition market Financial liberalization can strengthen local financial markets, leading to more efficient resource allocation, increased foreign investment, higher savings rates, and enhanced opportunities for risk diversification According to Buman et al (2013), the neoclassical perspective posits that markets efficiently allocate resources, forming the basis for concepts in liberalization This perspective supports the positive relationship between financial liberalization in both credit and capital markets and economic growth By introducing market principles and competition in banking, higher interest rates on deposits can stimulate savings and subsequently promote more investment, as noted by McKinnon (1973) and Buman et al.

(2013)believedthatfinancialliberalizationenablestoimplementmarketp r i n c i p l e a n d b a n k i n g c o m p e t i t i o n , t h i s w o u l d i n c r e a s e realinterestratesondepositswhichprovideanimportantboosttos a v i n g rates.Thes a v e r s whoareencouragedbythehigherinterestratetendtosave moremoney.Theh i g h er savingrates,inturn,providingmoreamountofresourcesavaila bletoinvestmentf u n d s I n a d d i t i o n , w h e n f i n a n c i a l l i b e r a l i z a t i o n o p e n s u p t h e c a p i t a l a c c o u n t , capitalinflows contribute intoc a p i t a l stock.F inancial liberalization providingopportunitytoriskdiversification,Bekae rtetal.

(2005)figuredoutthatimprovingriskdiversificationcouldreducethecostofequityca pitalandincreasei n v e s t m e n t B e c a u s e moref o r e i g n c a p i t a l s a r e a v a i l a b l e a f t e r f i n a n c i a l liberalization,externalfinancemoree a s i l y approach,d i r e c t l y decreasesfinancialconstraintsonfirms,so itleadtomoreinvestments.Moreover,diversificationcouldh e l p toavoidthefulleffectsofdo mesticshockasQuinn(1997)suggested.

Financiall i b e r a l i z a t i o n a n d f i n a n c i a l d e v e l o p m e n t h a v e a c a u s a l i t y c o r r e l a t i o n C h i n n andIto(2005)pointedthatfinancialliberalizationcanle adtodevelopmentoff in an ci al systemsthroughthesechannelssuchas:lesseningfin ancialrepressionto protectf i n a n c i a l m a r k e t s t h a t e n s u r i n g r e a l i n t e r e s t r a t e t o r i s e i n i t s c o m p e t i t i v e marketequilibrium Moreover, providingmoreportfoliodiversifica tioncouldr e d u c e c o s t o f e q u i t y c a p i t a l byr e d u c t i o n i n t h e e x p e c t e d r e t u r n s t o c o m p e n s a t e r i sk s Inaddition,financialliberalizationstrengthensonfi nancialinfrastructurebyp u t t i n g greaterpressureforreformingfinancialsyste mandeliminatinginefficientf i n a n c i a l i n s t i t u t i o n s I n o t h e r s t u d i e s , K l e i n a n d O l i v e i ( 1 9 9 9 ) g i v e t h e e v i d e n c e that financialliberalizationleadstofinancial deepening.

Financiall i b e r a l i z a t i o n c o u l d l e a d t o i n c r e a s e morei n t e r n a t i o n a l t r a d e a n d moreintegrationinworldmarket.Removingrestrictionsoncapitalaccountandcurrent a c c o u n t c o n d u c t tomoreeasilyinpaymentthathelptomoretradetransaction.Thiswi ll enhan cetoincreasethevolumeoftradeandservicesbetweenthe nationandforeign c o u n t r i e s B e c a u s e o f t h i s , t h e l o c a l marketi s morec o n n e c t e d w i t h t h e wo rl d market.Inthemanufacturingsector,thedomesticfactorofproductioncouldb e pai d w i t h th e r e l a t i v e pr ice a t a p p r o x i m a t e wo rl d p r i c e ( H e k m a n & Swee ney,1997);

Financialliberalizationcouldraisetotalfactorproductivity(TFP)isthesuggestiono f recentlyresearch.Becketal.

(2000)agreewithSchumpeterianviewoffinanceanddevelopment:thathigherle veloffinancialdevelopmentspureconomicgrowthbyaffectingtotalfactorproduc tivitygrowth.Thispointofviewobtainthesupportedf r o m L e v i n e ( 2 0 0 1 ) , B o n f i g l i o l i ( 2 0 0 8 ) , H e n r y ( 2 0 0 7 ) , B e k a e r t e t a l ,

P ) T h e u p d a t e h y p o t h e s i s e m p h a s i z e s thatthere a re somethinggoalon gwithfinancialliberalization, which could g i v e t h e b e n e f i t f o r t h e cou ntry,t h e p o t e n t i a l c o l l a t e r a l b e n e f i t I t c o u l d e n h a n c e t h e r a i s e oft o t a l f a c t o r p r o d u c t i v i t y bys t r e n g t h e n i n g i n s t i t u t i o n , k n o wled g e s p i l l o v e r i n F D I M o r e o v e r , p r o v i d i n g o p p o r t u n i t i e s f o r r i s k div ersification,t h a t c o u l d h e l p f i r m s a b l e t o i n v e s t i n h i g h e r g r o w t h t e c h n o l o g y p r o j e c t s , thusprovidinganimportantboosttoTFP.

Thepositivecorrelationbetweenfinancialliberalizationandeconomicgrowth hasb e e n presentedinnumberofstudiessuchas Quinn(1997),KleinandOlivei (1999),Qu in na n d T o y o d a ( 2 0 0 7 ) , C h i n n a n d I t o ( 2 0 0 5 ) , B e k a e r t e t a l ( 2 0 0 5 ) , H e n r y (2007),K o s e e t a l

( 2 0 1 0 ) , e t c O n t h e o t h e r h a n d , theo t h e r r e s e a r c h h a v e n o t supportedf orthehypothesisthatliberalizationspurgrowth,thatarethestudiesofRodrik(1998),Kra ay(1998),Stiglitz(2000).Thestudiesthatsupporttofinancialliberalizationcanb estatedasbelow:Quinn( 1 9 9 7 ) p r o c e s s i n g a c r o s s c o u n t r y r e g r e s s i o n fromyear1 9 6 0 t o 1 9 8 9 , c o v e r i n g 6 4 c o u n t r i e s , p r o v e d t h a t f i n a n c i a l li beralizationisrobustlyandpositivelycorrelatedwitheconomicgrowth.Henotedt h a t f i n a n c i a l l i b e r a l i z a t i o n s p u r g r o w t h s i n c e i t i n c r e a s e s t h e e f f i c i e n c y o f i n v e s t m e n t s incapitalandlabor.Asashiftingofrelatingpriceinaneconomy,thei n v e s t m e n t s couldchoosetoinvestinhighdemandand(or)lowsupplyininternati onalmarkets.Becauseofthis,investmentsbecamemoreefficient.Bekaerte t al.

(2005)usingtheequitymarketopennessindicatorproxyforfinancialliberalizati onwhichcovering95countries,demonstratedthattheresultoftheanalysisp r o v e t h e p o s i t i v e e f f e c t off i n a n c i a l l i b e r a l i z a t i o n one c o n o m i c g r o w t h T h e resultalso displaythatequitymarketliberalizationinducerealpercapitaGDPincreaseanapproxi mate1%annual.T h i s resultwasstatisticallysignificantandr o b u s t t o d i f f e r e n t g r o u p o f c o u n t r i e s , r e g i o n a l i n d i c a t o r v a r i a b l e C h i n n a n d I t o (200 5)a n a l y z i n g t h e d a t a o v e r t h e 1 9 7 0 -

A study covering 108 countries from the 2000 period highlighted that financial liberalization contributes to equity market development, while trade openness is a prerequisite for financial liberalization and subsequent financial development Bumann et al (2013) conducted a meta-analysis on the relationship between financial liberalization and economic growth, utilizing a larger sample of 60 empirical studies Their findings indicated that financial liberalization positively impacts economic growth, although the effect is not robust This suggests that financial liberalization alone is insufficient for achieving strong economic growth; countries must also focus on enhancing their industrial development and strengthening their financial systems to attain higher economic growth rates.

Stiglitz (2000) argued that treating financial markets like ordinary goods and services markets is a fallacy, as it overlooks the unique characteristics of financial systems He emphasized that the primary role of capital and financing markets is to collect and process information, particularly in evaluating firms and projects with the highest potential returns, and to monitor the use of lent funds Stiglitz and others contended that financial liberalization fails to address issues like asymmetric information, which can hinder efficient financial intermediation in liberalized markets When negative economic signals arise, bankers often withdraw their investments, a behavior mirrored by investors and lenders who react to perceived economic risks Additionally, capital market liberalization exposes a country's vulnerability to external economic fluctuations, leading to significant capital outflows when lender sentiment shifts regarding "emerging market risk." Consequently, the ease of capital outflow over inflow can result in increased instability, ultimately reducing potential investment in the economy.

In mainstream literature, numerous empirical studies highlight the theoretical perspectives supporting financial liberalization and its role in economic growth Quinn (1997) is among the first to examine this relationship, while Klein and Olivei (1999) utilize the "Share" indicator as a proxy for capital account liberalization, analyzing financial depth changes from 1986 to 1995 across 82 countries Their findings indicate a significant impact of capital account openness on financial depth, revealing that financial development positively affects per capita growth Notably, the authors observe a positive correlation between capital account liberalization and economic growth in developed countries, contrasting with non-industrial nations, where evidence does not support this relationship Similarly, Bailliu (2000) concludes that capital account openness fosters economic growth by promoting financial development, focusing specifically on a panel of 40 developing countries from 1975 onwards.

95;heinvestigatenotonlytheFDIbutalsoabroadofcapitalflowsoneconomicgrowth,an dhighlighttheroleofdomesticfinancialsectorsinthelinkagebetweencapitalflowsande conomicg r o w t h T h e r e s u l t o f h i s studys u g g e s t e d t h a t d o m e s t i c f i n a n c i a l s e c t o r playanimportantrolet o makes u r e t h a t i n t e r n a t i o n a l c a p i t a l f l o w s e n c o u r a g e e c o n o m i c growthindevelopingcountries.Heconcludedthatcapitalopennessspureconomicg r ow th i n t h e c o u n t r i e s t h a t h a v e o b t a i n e d a c e r t a i n l e v e l d e v e l o p m e n t i n t h e banking system.Otherwise,theeffe ctofcapitalflowsoneconomic growthisfoundt o b e n e g a t i v e T h e e x p l a n a t i o n ist h a t c a p i t a l i n f l o w i n g i n t o c o u n t r i e s w i t h l o w l e v e l developedbankingsectorslikelytobechanneledfro mproductiveinvestmentintospeculationtransactions.

Edwards(2001)presentedtheresultofhisstudy,agreeingwiththeideasthatt hee f f e ct offinancialliberalizationoneconomicgrowthdependonthelevelofdeve lopmento f a n e c o n o m y H e c o n c l u d e t h a t c a p i t a l a c c o u n t o p e n n e s s h a s a negat iv e e f f e c t o n e c o n o m i c g r o w t h i n t h e c o u n t r i e s w h e r e a r e l o w e r l e v e l o f income,buthasapositiveeffectinindustrialcountri esandinthericheremergingmarketcountries.EdwardusedbothQuinnvariables andshareproxyforfinancialliberalizationintheestimateregression,inthesampleof6 0countries,coveringthep e r i o d of1980syears.TheresultshowsthatQuinnvariable saresignificantassociated withgrowinpercapitalincome.However,theSharev ariablegivestheresultthatisnotrobustinhisregression.

Bonfiglioli(2008)appliedanewmethodtoevaluatetheimpactoffinancialliberaliza tiononeconomicperformance.Becausehethoughtthatitisv e r y importanttok n o w i n g aboutmechanismschannel,throughwhichfinancialliberalizationaffectseconomicgrowt h,toassessthecostandthebenefitsoff i n a n c i a l openness.Heattemptedtoevaluat etheimpactoffinancialliberalizationo n economicp e r f o r m a n c e t h r o u g h a s s e s s i n g e f f e c t off i n a n c i a l l i b e r a l i z a t i o n ont o t a l factorof productivity. Heexploitedthedataof70countries,coveringfromthep eri o d o f 2 5 yearsf r o m 1 9 7 5 t o 1 9 9 9 T h e r e s u l t i s o v e r a l l p o s i t i v e e f f e c t offi n a n ci a l liberaliz ationontotalfactorsproductivitygrowth,andnegligibleini n v e s t m e n t

Bonfiglioli argues that financial openness, akin to market integration for ordinary goods, can generate trade gains in financial services In countries with imperfect financial markets, services such as screening, monitoring, and debt structuring are crucial for firms seeking external capital Variations in the quality and specialization of financial products create demand for trade, and financial liberalization can yield significant trade gains Furthermore, the specialization of financial services enables firms globally to access the best prices for these services As firms explore diverse financial instruments, they can enhance their efficiency and productivity According to Galindo et al (2007), the growth in Total Factor Productivity (TFP) can be attributed to increased allocative efficiency Additionally, financial liberalization facilitates international risk diversification, allowing riskier yet productive projects to secure financing, thereby boosting aggregate TFP.

Severalstudies sh o w t h a t there is nor e l a t i o n s h i p betweenfinancialliberal ization a n d economicgrowth.

In a study conducted from 1966 to 1999, involving a sample of 61 countries, the results indicated that financial liberalizations do not necessarily spur economic growth The analysis was divided into two regression sets, one with 181 observations and another with 238 observations The authors utilized the average growth of per capita income as the dependent variable over five non-overlapping five-year periods In examining five-year growth rates, the "share" variable was employed as a proxy for capital account liberalization, alongside other comparable variables such as current account controls and a system of multiform exchange rates, sourced from the IMF.

AnnualReportonExchangeArrangementsandExchangeRestrictions(AREAER).In addition,themodelincludesvariablesthatareoftenused,forexample,politicalv a r i a b l e , initialGDP,andthelevelofeducation.Theresultisnotsupportingforthea s su m p t i o n thatcapitalaccountliberalizationenhanceseconomicgrowth.Insomec a s e s , thevariables“Share”,(CurrAcct),

(MultEx)enterwithanunexpectedsign.However,throughthisstudy,thereares omesupportingevidencesfortheideathatt h a t financialliberalizationassociateswi thexternaldisciplinewhichcouldhelptheco u n t r i e s a v o i d h i g h l e v e l o f i n f l a t i o n T h e e v i d e n c e i s t h a t , i n a moref i n a n c i a l o p en n e s s country,inflationisl owerthanclosecountries.WhenobservetheIFM’sindicatorvariables,theauthorfindt hatsmallpublicsectorsand independent centralb a n k havedirectgoodeffectongrowthandrestrainedinflation.Inthi scase,itiseasyt o h i g h e r a s s e s s m e n t t h e p o s i t i v e e f f e c t o f c a p i t a l a c c o u n t l i b e r a l i z a t i o n o n thesevariables.

Rodrik (1998) found no significant effect of capital account liberalization on economic growth in his regression analysis, which included a sample of 100 countries from both developed and developing regions, covering the period from 1975 to 1989 The growth regression model utilized real income per capita as the dependent variable, while capital account liberalization was proxied by the "Share" indicator The results indicated no relationship between financial openness and economic growth, nor between financial liberalization and inflation, leading him to question the impact of financial liberalization on economic growth He concluded that while macroeconomic policy measures and financial standards can mitigate potential economic risks, they cannot eliminate them entirely Additionally, advancements in technology and communications facilitate capital flows across borders, often disregarding government policies, thereby integrating domestic financial markets into the international market The critical inquiry remains whether countries truly benefit from accelerating financial liberalization processes.

Theoreticalliterature

EconomicGrowth and GrowthTheory

Economic growth refers to the positive change in the production of goods and services in a country over a specific period, often measured by Gross Domestic Product (GDP) or Gross National Product (GNP) Nominal GDP accounts for inflation, while real GDP is adjusted to eliminate the effects of inflation To compare economic growth between countries, GDP or GNP per capita is used, taking into account population differences Ultimately, economic growth can be viewed as an improvement in the overall quality of life.

Thisisnotonlya s anincreaseinproductivecapacitybutalsoasanenhancementthequa lityoflifeto thepeopleofthateconomy.Todepicttheissueofeconomicgrowth,b asingontheneoclassical,theexogenousgrowththeory,endogenousgrowththeoryare d e v e l o p e d

AccordingtoBarro(1991),Howitt(1999),inneoclassicalgrowththeory,economicg r o w th isgenerallyrelatedwithtechnologicalchanges.Solow-

Swangrowthmodel( e x o g e n o u s growth)reflectstherelationshipofoutputandca pital,labor,andtechnology.Economicgrowthwillexertifthereisanincreaseincapitalre lativetol a b o r u n t i l t h e e c o n o m y o b t a i n s t h e s t e a d y s t a t e A t t h e s t e a d y s t a t e , d e s p i t e a n increaseincapitalandlabor,economicgrowthwillbeunchanged.Atthattimethetechnolo gychangeplaysthekeyrolefortheeconomytoovercomethatsteadystate.Endogenous grow th theory

Endogenous growth theory, rooted in neoclassical principles, seeks to explain long-term economic growth through the creation of new technological knowledge driven by economic activities This theory emphasizes the "Schumpeterian" perspective on innovation, asserting that growth is determined by factors generated within the economic system rather than external influences Key elements, such as the AK model, illustrate that growth can stem from a constant returns to scale production function This foundational approach highlights the importance of opportunities and incentives in fostering technological advancements.

The new production function Y = AK, when divided by L, simplifies to y = Ak, demonstrating that the marginal productivity of capital (A) remains constant despite increases in the capital stock While this model assumes constant returns to scale, it does not explicitly address diminishing returns to scale The AK theory emphasizes the significance of capital as a key contributor to production, which in turn enhances human capital and leads to a linear increase in output relative to capital stock Additionally, the AK theory highlights that an economy's long-run growth rate is influenced by its saving rate, indicating that a higher saving rate correlates with a higher growth rate, while increased population growth rates may result in lower income per capita.

AghionandHowitt(1998)thinkthattherearesomedifferentbetweenneoclassicalmo delandendogenousgrowththeory thatinendogenousgrowththeory thegrowthp e r c a p i t a l c a n c o n t i n u e w i t h o u t b a s i n g one x o g e n o u s t e c h n o l o g y c h a n g e s , a n d t he r e isnoconvergenceofincome,sothatthepoorc ountrieswillnotnecessarilyg r o w t h fasterthanrichcountries.However,likewi thSolowmodel,thekeyroleofaccu mu lati on ofproductionfactorsandtheincrea singinproductivityinthegrowingprocessarealsoemphasizedinendogenousgrowthth eory.

Inthisstudybothoftheoriesareemployedtoexplainthecorrelationofthevariablesi n r e g r e s s i o n model,t h e f a c t o r e f f e c t i n g g r o w t h i n t h e economy.F o r ex ample,t he co n v e r g e n ce o f incomec o u l d b e i n t e r p r e t e d byneoclassical theory,a n d thetotalfactorproductivityincreasingisexplainedbyAKmodel,

FinancialDevelopment

Financialdevelopment isdefinedasanimprovementinthequality,quantityandthee f f i c i e n c y o f f i n a n c i a l s ystem.T h i s p r o c e s s i n v o l v e s t h e c o m b i n a t i o n o f m a n y activitiesand institutions.

Beck et al.(2000) agree with Schumpeterianview offinanceanddevelopment:thath i g h e r l e v e l o f f i n a n c i a l d e v e l o p m e n t s p u r economicg r o w t h bya f f e c t i n g t o t a l f acto r p r o d u c t i v i t y g r o w t h A c c o r d i n g t o L e v i n e ( 2 0 0 5 ) , f i n a n c i a l d e v e l o p m e n t h a p p e n s whenfinancialinstruments,marketsandintermediariesareimprovedbetter,the ntheyaffecttheinformation,enforcementandtransactioncosts.

Intheliteraturefinancialdevelopmentspurgrowthbythewellfunctioningfinancials y s t e m t hatcouldbebrieflypresentedthroughtwochannels:increaseinfinanciald e e p e n i n g thatraiseinvestment,andefficientresourceallocationwhichenhancetheproducti vitygrowthup

Financialdeepening isdefined asthe increasingthe ratiooffinancialassetstoGDPth at meansi n c r e a s i n g p r o v i d i n g f i n a n c i a l s e r v i c e s t o a l l l e v e l s o f a society.T h i s c o u l d encouragesaving,morecapitalaccumulating

Inaddition,financial d e v e l o p m e n t playsanim po rt an t roleinraisingprodu ctivity g r o w t h Assavingratesincreasing,saverscouldinvestinthefinancialsy stemandg a i n p r o f i t s Whentheyd o s o , c a p i t a l r u n s i n t o t h e f i n a n c i a l ma rkets,financiali n t e r m e d i a r i e s wherearewillinglytoscreening,selectingandmo nitoringpotentialusersofcapital.Afterthat,thegoodprojectswillbefinancebyt heoutsidecapitalan dt h e u n p r o d u c t i v e v e n t u r e s f a i l t o b e f i n a n c e d

T h i s p o i n t o u t t h a t f i n a n c i a l marketsa n d f i n a n c ia l i n t e r m e d i a r i e s co n tr ib ut e tod i s t r i b u t e r e s o u r c e s e ff ic ien tl y A t theendofthisprocess,productivityi sincreasinginthewholeeconomy.

(2000)financialdevelopment couldbemeas ur ed bythesize,theactivity,andthee fficiencyofthefinancialsector.

Tomeasurethesizeoffinancialsector,the“liquidliabilitiesratio”indicatorisused.T h i s i s formedbythe currencyplus demand and interest bearing liabilities financiali n t e r m e d i a r i e s andnon- bankfinancialintermediariesdividedbyGDP(Becketal.,2000);

(McKinnon,1973).Thisindicatorcouldalsobeusedasp ro xy forfinancialdeepenings inceitcoversalltypesoffinancialinstitutions.

Theactivityoffinancialsectorcouldbemeasurebytheroleofcommercial ban kcomparedwithcentralbankortheimportanceofbankintheallocationofsociety’ssavin gs.“Commercial-

Centralbankassets”indicatorwhichformedbytheratioofa s s e t ofdepositmoneyba nksdividedbythesumofassetsofdepositmoneybanksan d centralbankassets.

The "ratio of credit to the private sector" serves as a crucial indicator for assessing financial sector activity and the efficiency of resource allocation within it This measure is more advantageous than traditional monetary aggregates as it provides a clearer picture of the actual funds being directed to the private sector A higher ratio of domestic credit as a percentage of GDP typically correlates with increased domestic investment and a more developed financial system Consequently, domestic credit to the private sector can effectively act as a proxy for private credit (DeGregorio & Guidotti, 1995).

Financialdeepening isdefined asthe increasingthe ratiooffinancial assetstoGDPth at meansincreasingprovidingfinancialservicestoalllevelsofasoci ety.Thisismeasuredbyformula:

𝐺 𝑃�𝑃 WhereM2ismeasureo f t h e m o n e y supplyw h i c h i n c l u d i n g cash,c h e c k i n g , a n d savingaccount.

Financiald e e p e n i n g g e n e r a l l y us ed top r e s e n t t h e meaningo f i n c r e a s i n g r a t i o o f m o n ey supplytoGDP,thusexpressingtheliquidmoney.Inthetraditionmeanin g,h i g h e r liquidmoneyleadstomoreinvestment,moreopportunitiesandthenhig hereconomicgrowth.Asfinancialservicesareavailabletoindividualandhousehold s,t h e basicservicessuchashealth,educationbecomeeasilyt o beaccessedbycommonp eople,thusprovidinganimportantboosttopovertyreduction.

AccordingtoKingandLevine(1993)financialdeepeningisoneoffourindicatorst o measurefinancialdevelopmentofacountry.Intheirstudy,amongmanyotherst udies,financialdeepeninghasasignificantpositiveeffectoneconomicgrowth.

Thegovernmentpoliciesthatfocusedonrestrictingandcontrollingfinancialma rketshavebeenknowninliteratureasfinancialrepression.Manygovernments feelthemselvestheneedtoimpose manytypeofrestrictions whichareclassifie di n t o f o u r c a t e g o r i e s byt h e I M F ’ sA n n u a l R e p o r t o n E x c h a n g e A r r a n g e m e n t a n d Excha ng e Restrictions(AREAER)

Since the early 1970s, scholars have raised concerns about government policies aimed at controlling financial markets, arguing that such interventions hinder efficient functioning, impede the development of financial institutions, and distort domestic financial markets McKinnon (1973) and Shaw (1973) critiqued these restrictive policies, suggesting that governments often feel compelled to intervene in finance to mobilize support for activities they believe will bolster the domestic economy Reasons for these interventions may include fears of dependence on foreign capital, the need to support state-owned firms, or efforts to prevent domestic investors from seeking higher returns in international markets.

QuinnandToyoda(2007)suggestthatthroughthe1980s manydevelopingc o u n t r i e s c l e a r l y r e f u s e t h e m o d e l o f f i n a n c i a l o p e n n e s s p r o p o s e d byd e v e l o p e d countriesbecausethefearofdependencyinterpretationofmodernc apitalism.Ifac o u n t r y were t o a c c e p t t h e e x p o r t o f f o r e i g n c a p i t a l , its e t s i t s e l f u p f o r , a t b e s t , economicc o l o n i a l i s m Somec o u n t r i e s , h e n c e , f o r b i d i n t e r n a t i o n a l c a p i t a l T h i s standpointshowst h a t d e v e l o p i n g c o u n t r i e s s h o u l d b e t t e r k e e p i s o l a t e formr i c h c o u n t r i e s whoexploitpoor countrieswascentraltodevelopedcountrywealthanddevelopi ng countrypove rty.Inthedevelopmentpointofview,developingnationss h o u l d u n d e r t a k e i m p o r t s u b s t i t u t i o n i n d u s t r i a l i z a t i o n w h i c h a d v o c a t e s r e p l a c i n g f o r e i g n importswithdomesticproductioninordertoimprovetheirtermsoftrade, w h i c h requirespartialfinancialclosure.

Financialliberalizationisaverybroadtermthatusuallyhasthemeaningthatfewergovern mentr e g u l a t i o n s a n d r e s t r i c t i o n s i n t h e f i n a n c i a l m a r k e t Ino t h e r w o r d s , liberalizationreferstoderegulationorremovingofcontrols.FollowingK u n t an d

According to Levine (1996), the deregulation of interest rates and the loosening of entry policies have facilitated greater involvement of private entities, leading to significant financial development, particularly in developing countries where government policies previously constrained economic management Despite some challenges, financial liberalization has been implemented in various nations, addressing the underperformance of lending institutions and instruments Over the last two decades, many developing countries have reformed their domestic financial markets in response to both domestic and international demands In essence, financial liberalization involves the "opening up" of economies to foreign capital and investments, allowing for the free movement of money in and out of countries.

(2004)summarizethatfinancialliberalizationenhancestheefficiencyin resourceal location,makesriskdiversificationmoreeasilyavailabletothefirmsa n d i n v e s t o r s , s p e e d s u p p r o c e s s o f f i n a n c i a l d e v e l o p m e n t , h e n c e i m p r o v i n g t h e economicgrowth.

Various indicators have been developed to measure capital account openness for most countries worldwide, as noted by Cline (2010) and further elaborated by Cline (2011) These indicators can be categorized into three groups: de jure, de facto, and hybrid indicators, with the latter combining elements of both Most measures are based on data from the International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) Additionally, specific indicators have been created to assess the degree of financial liberalization, including "Share" from AREAER, "CAPITAL" by Quinn (1997), "KAOPEN" by Chinn & Ito (2007), and "KA" by Schindler (2009).

Int h i s study,“ K A O P E N ” i n d i c a t o r i s c h o s e n t o p r o x y f o r financialo p e n n e s s , b e c a u s e i t c o v e r s a p e r i o d timef r o m 1 9 7 0 t o 2 0 1 3 a n d i s a v a i l a b l e i n i n t e r n e t WhileQuinn’sCAPITALdatastopattheyear2004,toooldt ouse.Usuallyinther e g r e s s i o n estimation,Quinn’sCAPITALindicatorgivestheresult moresignificantt h an KAOPENindicator.However,itisnotupdatedinrecentyears,sotha titisnotchosen.KAhasnodataforLaoPDRandCambodia,anditjustcoverfrom

2.1.2.4 FinancialLiberalizationandEconomicGrowthTh e mainstream point of view

Ing e n e r a l , manys c h o l a r s h a v e a g r e e d w i t h t h e p e r s p e c t i v e t h a t f i n a n c i a l liberalizationspurseconomicgrowththroughseveralchannels:firstly,strengthen inglocalfinancialmarket,sothatleadsmoreefficientinallocationofr e s o u r c e s , more foreigninvestment, more savingrate,providing opportunities forr i s k div ersification.Secondly, helptodevelopfinancial systems.Thirdly,pickingu p thevolumeoftradeandservice,andhencerampupthecompetitiveabilitiesoflocal country.

Recentyears,agreatnumberofdescriptionsandanalyseshavebeenconductedtoc l a r i f y therelationshipbetweenfinancialliberalizationandeconomicgrowth.Intheliteratur e,asthemainstreampointofviewisthatfinancialliberalizationhast h e p o s i t i v e r e l a t i o n s h i p w i t h e c o n o m i c g r o w t h T h e f i r s t timem e n t i o n i n g o f lib eralizationispresentedbyMcKinnon( 1 9 7 3 ) a n d S h a w ( 1 9 7 3 ) B o t h a u t h o r s c r i t i c a l l y focusonfinancialrepression,foritwasknownas restrictingandco ntrollinginfinancialmarkets.Thispresentedbytheinterventionofgovernmentsuc hasenforcementtheinterestrateceilings,directedcreditandsubsidiestobanks.McKinnon(19

The weakness of economic systems, attributed to both institutional and policy shortcomings, hampers the effective mobilization and reallocation of resources Authors argue that firms face financing constraints when relying solely on internal funds, advocating for a perfectly competitive market Financial liberalization is proposed as a means to strengthen local financial markets, leading to more efficient resource allocation, increased foreign investment, and higher savings rates, which in turn provide opportunities for risk diversification According to Buman et al (2013), the neoclassical perspective posits that markets are efficient in allocating scarce resources, forming the basis for many concepts in liberalization This perspective supports the idea that financial liberalization in both credit and capital markets fosters economic growth By introducing market principles and competition in banking, interest rates on deposits can rise, encouraging more savings and subsequently boosting investment, as suggested by McKinnon (1973) and Buman et al.

(2013)believedthatfinancialliberalizationenablestoimplementmarketp r i n c i p l e a n d b a n k i n g c o m p e t i t i o n , t h i s w o u l d i n c r e a s e realinterestratesondepositswhichprovideanimportantboosttos a v i n g rates.Thes a v e r s whoareencouragedbythehigherinterestratetendtosave moremoney.Theh i g h er savingrates,inturn,providingmoreamountofresourcesavaila bletoinvestmentf u n d s I n a d d i t i o n , w h e n f i n a n c i a l l i b e r a l i z a t i o n o p e n s u p t h e c a p i t a l a c c o u n t , capitalinflows contribute intoc a p i t a l stock.F inancial liberalization providingopportunitytoriskdiversification,Bekae rtetal.

(2005)figuredoutthatimprovingriskdiversificationcouldreducethecostofequityca pitalandincreasei n v e s t m e n t B e c a u s e moref o r e i g n c a p i t a l s a r e a v a i l a b l e a f t e r f i n a n c i a l liberalization,externalfinancemoree a s i l y approach,d i r e c t l y decreasesfinancialconstraintsonfirms,so itleadtomoreinvestments.Moreover,diversificationcouldh e l p toavoidthefulleffectsofdo mesticshockasQuinn(1997)suggested.

Financiall i b e r a l i z a t i o n a n d f i n a n c i a l d e v e l o p m e n t h a v e a c a u s a l i t y c o r r e l a t i o n C h i n n andIto(2005)pointedthatfinancialliberalizationcanle adtodevelopmentoff in an ci al systemsthroughthesechannelssuchas:lesseningfin ancialrepressionto protectf i n a n c i a l m a r k e t s t h a t e n s u r i n g r e a l i n t e r e s t r a t e t o r i s e i n i t s c o m p e t i t i v e marketequilibrium Moreover, providingmoreportfoliodiversifica tioncouldr e d u c e c o s t o f e q u i t y c a p i t a l byr e d u c t i o n i n t h e e x p e c t e d r e t u r n s t o c o m p e n s a t e r i sk s Inaddition,financialliberalizationstrengthensonfi nancialinfrastructurebyp u t t i n g greaterpressureforreformingfinancialsyste mandeliminatinginefficientf i n a n c i a l i n s t i t u t i o n s I n o t h e r s t u d i e s , K l e i n a n d O l i v e i ( 1 9 9 9 ) g i v e t h e e v i d e n c e that financialliberalizationleadstofinancial deepening.

Financiall i b e r a l i z a t i o n c o u l d l e a d t o i n c r e a s e morei n t e r n a t i o n a l t r a d e a n d moreintegrationinworldmarket.Removingrestrictionsoncapitalaccountandcurrent a c c o u n t c o n d u c t tomoreeasilyinpaymentthathelptomoretradetransaction.Thiswi ll enhan cetoincreasethevolumeoftradeandservicesbetweenthe nationandforeign c o u n t r i e s B e c a u s e o f t h i s , t h e l o c a l marketi s morec o n n e c t e d w i t h t h e wo rl d market.Inthemanufacturingsector,thedomesticfactorofproductioncouldb e pai d w i t h th e r e l a t i v e pr ice a t a p p r o x i m a t e wo rl d p r i c e ( H e k m a n & Swee ney,1997);

Financialliberalizationcouldraisetotalfactorproductivity(TFP)isthesuggestiono f recentlyresearch.Becketal.

(2000)agreewithSchumpeterianviewoffinanceanddevelopment:thathigherle veloffinancialdevelopmentspureconomicgrowthbyaffectingtotalfactorproduc tivitygrowth.Thispointofviewobtainthesupportedf r o m L e v i n e ( 2 0 0 1 ) , B o n f i g l i o l i ( 2 0 0 8 ) , H e n r y ( 2 0 0 7 ) , B e k a e r t e t a l ,

P ) T h e u p d a t e h y p o t h e s i s e m p h a s i z e s thatthere a re somethinggoalon gwithfinancialliberalization, which could g i v e t h e b e n e f i t f o r t h e cou ntry,t h e p o t e n t i a l c o l l a t e r a l b e n e f i t I t c o u l d e n h a n c e t h e r a i s e oft o t a l f a c t o r p r o d u c t i v i t y bys t r e n g t h e n i n g i n s t i t u t i o n , k n o wled g e s p i l l o v e r i n F D I M o r e o v e r , p r o v i d i n g o p p o r t u n i t i e s f o r r i s k div ersification,t h a t c o u l d h e l p f i r m s a b l e t o i n v e s t i n h i g h e r g r o w t h t e c h n o l o g y p r o j e c t s , thusprovidinganimportantboosttoTFP.

Thepositivecorrelationbetweenfinancialliberalizationandeconomicgrowth hasb e e n presentedinnumberofstudiessuchas Quinn(1997),KleinandOlivei (1999),Qu in na n d T o y o d a ( 2 0 0 7 ) , C h i n n a n d I t o ( 2 0 0 5 ) , B e k a e r t e t a l ( 2 0 0 5 ) , H e n r y (2007),K o s e e t a l

( 2 0 1 0 ) , e t c O n t h e o t h e r h a n d , theo t h e r r e s e a r c h h a v e n o t supportedf orthehypothesisthatliberalizationspurgrowth,thatarethestudiesofRodrik(1998),Kra ay(1998),Stiglitz(2000).Thestudiesthatsupporttofinancialliberalizationcanb estatedasbelow:Quinn( 1 9 9 7 ) p r o c e s s i n g a c r o s s c o u n t r y r e g r e s s i o n fromyear1 9 6 0 t o 1 9 8 9 , c o v e r i n g 6 4 c o u n t r i e s , p r o v e d t h a t f i n a n c i a l li beralizationisrobustlyandpositivelycorrelatedwitheconomicgrowth.Henotedt h a t f i n a n c i a l l i b e r a l i z a t i o n s p u r g r o w t h s i n c e i t i n c r e a s e s t h e e f f i c i e n c y o f i n v e s t m e n t s incapitalandlabor.Asashiftingofrelatingpriceinaneconomy,thei n v e s t m e n t s couldchoosetoinvestinhighdemandand(or)lowsupplyininternati onalmarkets.Becauseofthis,investmentsbecamemoreefficient.Bekaerte t al.

(2005)usingtheequitymarketopennessindicatorproxyforfinancialliberalizati onwhichcovering95countries,demonstratedthattheresultoftheanalysisp r o v e t h e p o s i t i v e e f f e c t off i n a n c i a l l i b e r a l i z a t i o n one c o n o m i c g r o w t h T h e resultalso displaythatequitymarketliberalizationinducerealpercapitaGDPincreaseanapproxi mate1%annual.T h i s resultwasstatisticallysignificantandr o b u s t t o d i f f e r e n t g r o u p o f c o u n t r i e s , r e g i o n a l i n d i c a t o r v a r i a b l e C h i n n a n d I t o (200 5)a n a l y z i n g t h e d a t a o v e r t h e 1 9 7 0 -

A study covering 108 countries from the 2000 period highlights that financial liberalization significantly contributes to equity market development, with trade openness being a prerequisite for financial liberalization and subsequent financial development Bumann et al (2013) conducted a meta-analysis of the relationship between financial liberalization and economic growth, utilizing a larger sample size of 60 empirical studies Their findings indicate that while financial liberalization has a positive impact on economic growth, this effect is not robust This suggests that financial liberalization alone is insufficient for achieving strong economic growth; countries must also focus on enhancing their industrialization processes and strengthening their financial systems.

Stiglitz (2000) argued that treating financial markets like ordinary goods and services markets is a fallacy, as it overlooks the unique characteristics of financial and capital markets He emphasized that the primary role of these markets is to collect and process information, particularly in assessing firms and projects with the highest return potential, while also monitoring the use of lending funds Stiglitz and others posited that financial liberalization does not resolve issues such as asymmetric information, which can hinder effective financial intermediation in liberalized markets When bankers perceive negative economic signals, they tend to withdraw their investments, a behavior mirrored by other investors who react to the same signals Additionally, capital market liberalization exposes a country to external economic fluctuations, leading to significant capital outflows when lenders reassess "emerging market risk." This tendency for capital outflow, which is easier than inflow, can result in greater economic instability and diminish potential investments in the economy.

EmpiricalStudies

In mainstream literature, numerous empirical studies highlight the theoretical perspectives supporting financial liberalization Notably, Quinn (1997) was among the first to investigate the impact of financial liberalization on economic growth Klein and Olivei (1999) utilized the “Share” indicator as a proxy for capital account liberalization, analyzing financial depth changes across 82 countries from 1986 to 1995 Their findings indicate a significant relationship between capital account openness and financial depth, demonstrating that financial development positively affects per capita growth While their research shows a beneficial impact of capital account liberalization on economic growth in developed countries, it reveals no supporting evidence for non-industrial nations Similarly, Bailliu (2000) concludes that capital account openness fosters economic growth by promoting financial development, focusing specifically on a panel of 40 developing countries from 1975 onward.

95;heinvestigatenotonlytheFDIbutalsoabroadofcapitalflowsoneconomicgrowth,an dhighlighttheroleofdomesticfinancialsectorsinthelinkagebetweencapitalflowsande conomicg r o w t h T h e r e s u l t o f h i s studys u g g e s t e d t h a t d o m e s t i c f i n a n c i a l s e c t o r playanimportantrolet o makes u r e t h a t i n t e r n a t i o n a l c a p i t a l f l o w s e n c o u r a g e e c o n o m i c growthindevelopingcountries.Heconcludedthatcapitalopennessspureconomicg r ow th i n t h e c o u n t r i e s t h a t h a v e o b t a i n e d a c e r t a i n l e v e l d e v e l o p m e n t i n t h e banking system.Otherwise,theeffe ctofcapitalflowsoneconomic growthisfoundt o b e n e g a t i v e T h e e x p l a n a t i o n ist h a t c a p i t a l i n f l o w i n g i n t o c o u n t r i e s w i t h l o w l e v e l developedbankingsectorslikelytobechanneledfro mproductiveinvestmentintospeculationtransactions.

Edwards(2001)presentedtheresultofhisstudy,agreeingwiththeideasthatt hee f f e ct offinancialliberalizationoneconomicgrowthdependonthelevelofdeve lopmento f a n e c o n o m y H e c o n c l u d e t h a t c a p i t a l a c c o u n t o p e n n e s s h a s a negat iv e e f f e c t o n e c o n o m i c g r o w t h i n t h e c o u n t r i e s w h e r e a r e l o w e r l e v e l o f income,buthasapositiveeffectinindustrialcountri esandinthericheremergingmarketcountries.EdwardusedbothQuinnvariables andshareproxyforfinancialliberalizationintheestimateregression,inthesampleof6 0countries,coveringthep e r i o d of1980syears.TheresultshowsthatQuinnvariable saresignificantassociated withgrowinpercapitalincome.However,theSharev ariablegivestheresultthatisnotrobustinhisregression.

Bonfiglioli(2008)appliedanewmethodtoevaluatetheimpactoffinancialliberaliza tiononeconomicperformance.Becausehethoughtthatitisv e r y importanttok n o w i n g aboutmechanismschannel,throughwhichfinancialliberalizationaffectseconomicgrowt h,toassessthecostandthebenefitsoff i n a n c i a l openness.Heattemptedtoevaluat etheimpactoffinancialliberalizationo n economicp e r f o r m a n c e t h r o u g h a s s e s s i n g e f f e c t off i n a n c i a l l i b e r a l i z a t i o n ont o t a l factorof productivity. Heexploitedthedataof70countries,coveringfromthep eri o d o f 2 5 yearsf r o m 1 9 7 5 t o 1 9 9 9 T h e r e s u l t i s o v e r a l l p o s i t i v e e f f e c t offi n a n ci a l liberaliz ationontotalfactorsproductivitygrowth,andnegligibleini n v e s t m e n t

Bonfiglioli argues that financial openness acts as a catalyst for market integration in financial services, generating trade gains similar to those from ordinary goods In countries with imperfect financial markets, services like screening, monitoring, and debt structuring become crucial for firms seeking external capital The variations in quality and specialization of financial products create demand for trade, and financial liberalization can yield typical trade gains due to these differences Additionally, specialization in financial services allows firms globally to access the best prices for financial offerings and identify suitable financial instruments This growth in total factor productivity (TFP) can be attributed to increased allocative efficiency, as suggested by Galindo et al (2007) Furthermore, financial liberalization enhances tools for international risk diversification, enabling the financing of riskier, more productive projects, thereby significantly boosting aggregate TFP.

Severalstudies sh o w t h a t there is nor e l a t i o n s h i p betweenfinancialliberal ization a n d economicgrowth.

In a study conducted from 1966 to 1999 involving 61 countries, the findings indicate that financial liberalization does not necessarily spur economic growth The research utilized two sets of regression analyses: one with 181 observations and another with 238 observations The authors focused on the average growth of per capita income as the dependent variable over five non-overlapping five-year periods In their analysis of five-year growth rates, they employed a "share" variable to represent capital account liberalization, alongside other comparable variables like current account controls and a system of multiform exchange rates, sourced from the IMF.

AnnualReportonExchangeArrangementsandExchangeRestrictions(AREAER).In addition,themodelincludesvariablesthatareoftenused,forexample,politicalv a r i a b l e , initialGDP,andthelevelofeducation.Theresultisnotsupportingforthea s su m p t i o n thatcapitalaccountliberalizationenhanceseconomicgrowth.Insomec a s e s , thevariables“Share”,(CurrAcct),

(MultEx)enterwithanunexpectedsign.However,throughthisstudy,thereares omesupportingevidencesfortheideathatt h a t financialliberalizationassociateswi thexternaldisciplinewhichcouldhelptheco u n t r i e s a v o i d h i g h l e v e l o f i n f l a t i o n T h e e v i d e n c e i s t h a t , i n a moref i n a n c i a l o p en n e s s country,inflationisl owerthanclosecountries.WhenobservetheIFM’sindicatorvariables,theauthorfindt hatsmallpublicsectorsand independent centralb a n k havedirectgoodeffectongrowthandrestrainedinflation.Inthi scase,itiseasyt o h i g h e r a s s e s s m e n t t h e p o s i t i v e e f f e c t o f c a p i t a l a c c o u n t l i b e r a l i z a t i o n o n thesevariables.

Rodrik (1998) found no significant effect of capital account liberalization on economic growth in his regression analysis, which included a sample of 100 countries from both developed and developing regions, covering the period from 1975 to 1989 His growth regression model, with real income per capita as the dependent variable and capital account liberalization proxied by a “Share” indicator, revealed no relationship between financial openness and economic growth or between financial liberalization and inflation He questioned the impact of financial liberalization on economic growth, suggesting that while macroeconomic policies and financial standards can mitigate potential economic risks, they cannot entirely eliminate them As advancements in technology and communications facilitate global capital flows that often bypass government policies, the domestic financial market increasingly integrates into the international market This raises the critical question of whether countries truly benefit from accelerating the process of financial liberalization.

Kraay (1998) concludes that there is no support for the hypothesis that financial liberalization directly contributes to economic growth His regression model analyzes various indicators of financial liberalization, including "Share" and Quinn’s capital account openness (referred to as "CAPITAL"), using output growth data from 1985 to 1997 as the dependent variable The study employs cross-sectional data with one observation per country and utilizes both ordinary least squares (OLS) regression and an instrumental variable approach with lagged capital account liberalization variables The findings indicate no significant impact of the "Share" or "CAPITAL" indicators on growth Kraay attributes the lack of strong empirical evidence for the benefits of financial liberalization to the inherent volatility associated with it, suggesting that countries can realize the advantages of financial liberalization only when supported by appropriate policies and a conducive institutional environment.

Financial liberalization has been shown to negatively impact economic growth, as increased competition in the banking sector leads to lower profits and encourages risky asset portfolios Banks may engage in gambling behavior to seek higher profits, which can result in significant losses and a loss of depositor confidence when these gambles fail The deregulation of interest rates and the removal of restrictions on asset choices have facilitated banks' access to risky investments, exacerbating the problem This heightened competition diminishes the incentive for banks to lend to viable projects, increasing moral hazard issues Furthermore, financial liberalization allows banks to participate in a broader range of transactions, including derivatives and foreign currency trades, which can further promote gambling operations within the sector Ultimately, the authors conclude that financial liberalization fosters intense competition among banks and increases the likelihood of gambling behavior, posing risks to the stability of the banking system.

ChapterRemarks

Financial liberalization undoubtedly promotes economic growth by strengthening local financial markets, leading to more efficient resource allocation, increased foreign investment, and higher savings rates, which provide opportunities for risk diversification It also contributes to the development of financial systems, enhances trade volume and services, and raises total factor productivity (TFP), thereby boosting the competitive abilities of local countries However, it is essential to acknowledge the potential negative effects that require careful attention to mitigate harm There exists a trade-off between the benefits and unexpected consequences of the liberalization process While financial transactions carry inherent risks, participating in globalization is a significant trend, necessitating the acceptance of these risks This study employs regression estimation techniques to examine the impact of financial liberalization on economic growth in ASEAN countries, utilizing the KAOPEN index as a variable to proxy for financial liberalization Unlike previous studies, this research focuses on the dynamic Asian region, covering a new sample of ten ASEAN countries from 1990 to 2013.

Financial Liberalization Potential Collateral Benefits The Former View

-More efficient international allocation of capital -Financial market development

-Better governance Macroeconomic discipline -International risk- diversification

New technology and management techniques that help raising the efficiency of firms and give economy wide knowledge spillovers Encourage investment in higher growth technologies

Increased Capital accumulation, total factor productivity growth

Source: Aut hor’s s elf summary

Ther o l e o f f i n a n c i a l l i b e r a l i z a t i o n i n economicg r o w t h c o u l d b e i l l u s t r a t e d t h a t f in an c i a l l i b e r a l i z a t i o n s p u r s e c o n o m i c g r o w t h byit s t r e n g t h e n i n g l o c a l f i n a n c i a l market,sothatleadsmoreefficientinallocationofresou rces,moreforeigninvestment,moresavingrate,providingopportunitiesforrisk diversification.B e s i d e s t h a t i t h e l p s tod e v e l o p f i n a n c i a l s y s t e m s

F u r t h e r m o r e , p i c k i n g u p t h e volumeo f t r a d e a n d s e r v i c e , a n d r a i s i n g t o t a l f a c t o r p r o d u c t i v i t y ( T F P ) H e n c e , r a m p upthecompetitiveabiliti esoflocalcountry.Thishypothesisissupportedbymanys c h o l a r s M c K i n n o n ( 1 9 7 3 ) , L e v i n e ( 1 9 9 6 ) , Q u i n n ( 1 9 9 7 ) , C l a e s s e n s a n d Glaess ner( 1 9 9 8 ) , C h i n n a n d I t o ( 2 0 0 5 ) , B e k e a r t e t a l

(2009)andothermore.T h e u p d a t e h y p o t h e s i s e m p h a s i z e s t h a t t h e r e a r e s o m e t h i n g g o a l o n g withf i n an ci a l liberalization,whichcouldgivethebenefitf orthecountry,thepotentialcollateralbenefit I t c o u l d enhance th era ise of t o t a l factor pr od uc ti vi ty bystrengtheninginstitution,knowledgespilloverinFDI,pro vidingopportunitiesf o r r i s k d i v e r s i f i c a t i o n t h a t c o u l d h e l p firmsa b l e t o i n v e s t i n h i g h e r g r o w t h technologies.

Thischaptercontainssixsections.Thefirstsectionpresentstheempiricalmodel semployedonpreviousresearches.Thesecondsectionprovidesmeasurestoasses sf i n a n c i a l liberalization.Thethirdsectiondisplaysendogenousp r o b l e m Thenextse ctionpresentsthemeasuringofvariables.Thelasttwosectionscontentsthedatacollectionan dresearchmethodologyrespectively.

ModelSpecification

Numerous studies have explored the positive effects of financial liberalization on economic growth and development over the long term These studies empirically examine the relationship between financial liberalization and economic growth, utilizing growth models where variables such as investment levels, population growth, education, and initial GDP value serve as indicators for financial liberalization Researchers, including Becket al., have contributed significantly to this body of literature, highlighting the importance of financial liberalization as a catalyst for economic advancement.

(2005);QuinnandToyoda(2008)adoptedthissimilarmodelintheirempiricalre searches.Inempiricalresearch,ther e su l t s o f a c r o s s st u d i e sa r e verywideva r i o us T h i s ca n b e i m p l i e da numbero f differencesindiversestudies.

Cline( 2 0 1 0 ) c o n f i r m e d t h i s m o d e l i s t h e s y n t h e s i s a p p r o a c h f o r c a l c u l a t i o n t h e impactoffinancialliberalizationoneconomicgrowth.Thegeneralformis: g=α+βXX+∑γZγZZ

The annual growth rate, denoted as g, can be measured either as total or per capita, depending on the model used X represents the indicator for financial openness, while Z serves as a control variable In analyzing g, population growth is considered exogenous to financial openness, allowing the coefficient on openness from a specific model to be applied without concern for whether total or per capita growth is utilized as the dependent variable in the study.

Int h e r e s e a r c h t h a t applyt h e modeli n w h i c h o p e n n e s s i n t e r a c t s wit ha n o t h e r v a r i a b l e suchasdomesticbankingdeptoreducationlevel,theformturnsto g=α+βXX+δ(XV)+∑γZγZZ

Insomecases,toreachthesynthesisofcountryestimatesonthemodelparametersf r o m anumberofdifferentstudies,boththeconstantαandthecontrolvariables(

∑γZγZZ)canbedropoutof the model,forbothof themliketheexogeneoustothe i mp act ofthefinancialliberalization Whenitdidso,themodelremainsonlyβX Xan dδ(XV)andbecomes g=βXX+δ(XV)

Manymodelsfromt h e l i t e r a t u r e a r e f o r m e d t o c a l c u l a t e t h e s e termsa n d g e t t h e r e s u l t thattheimpliedcontributionoffinancialliberalizationtoeconomicg rowth.Th e variablethatproxyf o r financialliberalization,X,willchangeacrossthemo dels.Forthedifferenttimeperiods,themeasuressetofopennesswillshowthec h a n g e inthelevelofopenness.Itisusefulinauniformsharpdirectionacrossthediffere nt measuresforanygivencountries.

Since 2004, there has been a significant increase in empirical studies examining the potential benefits of financial liberalization, particularly its positive impacts on long-term economic growth and development These studies verify the relationship between financial liberalization and economic growth using various growth models However, differences exist among these studies, such as the selection of countries sampled; some focus on industrial nations, while others analyze developing countries or a mix of both Additionally, the time periods examined may vary, which is particularly relevant for developing countries experiencing recent financial liberalizations Methodological approaches also differ, with some authors using cross-sectional, time series, or panel data Cross-sectional analyses can face limitations like omitted variable bias and unobserved country-specific effects To address these issues, many researchers recommend employing a dynamic panel data approach instead of relying solely on cross-sectional data.

Yisdependentvariablewhichcanbeeither,growth,Capitalgrowth,Production ,o rSaving.

Libi;tismainadditiontotheliteratureistoverifyt h e effectofaddinganliberalizationvari able,Libi;t;tothegrowthregression

In 2005, research indicated that when controlling for other variables, initial GDP serves as a proxy for a stable state level of GDP, typically showing a negative correlation with growth rates, suggesting that lower GDP levels are associated with higher growth potential Additionally, life expectancy is positively correlated with economic growth, as longer life spans often accompany stronger economic performance While population growth can contribute to an increasing labor force, it may also lead to a decrease in per capita growth rates In some models, population growth demonstrates a significant negative impact, whereas in others using OLS standard errors, its effect appears to be insignificant.

(2011)presentthegrowthmodelsthatappliedforthisstudyasbelowThebasemodelformQui nn&Toyoda(2008) ΔGDPGDPi,t=βX0+ βX1(ΔGDPFinancialGlobalizationVariablei,t-1(2))

+βX2(Incomei,t-1)+βX3(ΔGDPTradeOpennessi,t-1) +βX4(ΔGDPInvestmenti,t-1)+βX5(ΔGDPPopulationGrowthi,t-1) +uniteffects+perioddummies+εi,tF o ri=1,2

,…,187, Where[FinancialGlobalizationVariable]=“CAPITAL”indicator.Thisproxyforf i n a n c i a l liberalizationandcalculatedbyQuinnhimself.

+βX2(Income i,t-1 )+βX3(LifeExpectancy i,t-1 ) +βX4(ΔGDPEducationalAttainment i,t-1 )+βX5(ΔGDPPopulationGrowth i,t-1 ) +βX6(GovernmentExpenditurei,t-1)+perioddummies

[OfficialLiberalizationindicator]:Datingequitymarketliberalization.Basedonth e a s s e s s m e n t t h a t f o r e i g n I n v e s t o r s o f f i c i a l l y h a v e t h e o p p o r t u n i t y toi n v e s t i n domesticequitys e c u r i t i e s o r n o t I t t a k e t h e v a l u e o f 1 w h e n fullyl i b e r a l i z e d c o u n t r y andzerootherwise.ItisdevelopedbyBekaertetal.(2005).

[IMFCapitalaccountopenness]isthemeasurementofcapitalaccountopennes sbyemployingtheIMF’sAnnualReportonExchangeArrangementsandExchangeR estrictions(AREAER).

Throught h e t w o a b o ve models,t h e f i n a n c ia l liberalizationvariablesarechangedb e l o n g t o t h e a u t h o r ’ s c h o i c e T h e c o n t r o l v a r i a b l e s a r e s i m i l a r l y t h e s a m e , b u t modelofBekaertetal.

Qu in n in d i cat o r willbereplacedbyChinn’sindicatorthatisavailableto2013data,then e w e s t d a t a ofChinnn’si n d i c a t o r I t a l s o i s t h e g o o d proxyf o r f i n a n c i a l liberalization.

Measuring Financial liberalization

TheIMF’sAREAER

InternationalMonetaryFund(IMF).Thisr e p o r t hasbeenpublishedannuallysince19 50.Thisisalsoameasureofanation’sl e v e l ininternationalfinanciallawandprac tices.Becauseofthis,

(AREAER)hasb e en aprimaryprominentfoundationdataforthemostindicatorsoff inanceo p e n n e s s

AREAER is a long-term research report that examines the evolving economies of countries worldwide The IMF has been monitoring the economic conditions of over 180 countries through extensive research, including data collected from official staff visits and consultations with national authorities This comprehensive analysis highlights the rules and restrictions governing capital flows and differentiates between resident and non-resident transaction agents Since its inception in 1950, AREAER has been published in a prose format, detailing the laws and regulations that countries enforce to manage cross-border financial transactions and the associated proceeds.

Fromv o l u m e 1 9 6 7 t o 1 9 9 6 , A R E A E R w a s p r e s e n t e d i n a n e w e d i t i o n , w h i c h involvedasummarytable.Thetableisnamedas“SummaryFeaturesofE xchange andT r a d e S y s t e m s inMemberC o u n t r i e s , ” t h a t d e p i c t e d w h e t h e r t h e r e a r e t h e restrictionsonresidentspaymentsinvarioustypesofcurrentandcapitala ccountorn o t E d i s o n e t a l

In 2004, a significant table titled “Restriction on Payments for Capital Transactions” highlighted essential information regarding a country's capital control regulations, serving as a foundation for developing a financial liberalization indicator China and Ito (2007) categorized the controls on cross-border financial transactions into four groups: applying multiple exchange rates, enforcing restrictions on current account transactions, limiting capital account transactions, and mandating the surrender of export proceeds Their analysis emphasized that capital account restrictions, often combined with current account restrictions, have frequently been utilized to create a dummy variable indicating the presence of restrictions on capital account transactions, a concept also echoed by Quinn et al.

In 2011, it was argued that table indicators can be easily converted into level measures, typically represented in binary 0/1 formats, and utilized in regression analysis This method has been employed by various authors in their research, including Grilli & Ferretti (1995), Garrett (1995), Klein (2003), and Edis et al (2004) Since 1997, a new tabular format has emerged, enhancing the richness of information presented The post-1997 AREAER structure features 13 distinct spheres of capital account transactions, highlighting the diversity among countries due to varying types of restrictions This advancement offers a more comprehensive view of capital account restrictions, types of investors, and associated categories.

Quinn’sMeasure

Inh i s study,h e d i s t i n g u i s h e d t h e e n f o r c e m e n t o f c o n t r o l b e t w een“ r e c e i p t s ” a n d “payment”s e p a r a t e l y B e c a u s e o f t h i s , C a p i t a l ac c o u n t t r a ns a c t i o ns a r e s p l i t i n t o t w o dimensions“inward”and“outward”capitalaccounttran sactions.Tomeasuret h e intensityofcontroloncapitalaccounttransactionshe constructedthevariable “CAP I TAL ” andscoredona0-

(0.5)isappliedforthecases oflawsthatenforceq u a n t i t a t i v e orotherregulat oryconstraints,suchaslicenses;

(1)indicatesthattheauthority approvalisrequiredorheavytaxesaresubjectedforthetra nsactions;(1.5)isusedforthestatesthattherearelessheavytaxesontransactions; (2)isreservedf o r thesituationsthattransactionsarefreeofconstraintsortaxes.

Forthecurrentaccounttransactions,theconstructedisasthesamemethod,whichse paratedintof o u r dimensions:t w o dimensionsf o r goodsandt w o f o r services.T h e n , thisisscoredona0-8scaletomeasuring.ThisiscodedCURRENT.

The concept of "Onemored" introduces a seventh dimension, known as AGR EE, to assess the intensity of domestic laws This framework is rooted in international legal agreements that limit a nation's activities regarding exchange and capital flows When countries participate in international economic organizations, they typically commit to liberalizing aspects of their financial markets Consequently, AGR EE serves as a measure of a government's dedication to refraining from imposing restrictions on its financial market, with scores ranging from 0.

14scaletomeasureoffinancialopenness,andthisiscalledOPENNESS.Inther e s ea r ch ofQuinn&Toyoda(2008)theCURRENTindicatorwasrenamedF IN AN CIA L CURRENT(FIN_CURRENT).Therearealsothetransformingeachmeasur ei n t o a 0 - 1 0 0 s c a l e byt a k i n g 1 0 0 * ( C A P I T A L / 4 ) a n d

KAOPENMeasure

The IMF's AREAER is unlikely to effectively measure the intensity of capital controls, as it primarily focuses on the extent and nature of restrictions across various countries, making its variables too general to accurately reflect the diverse types of actual capital controls Additionally, capital control policies can be implemented without clear policy targets, leading to situations where the private sector evades capital account restrictions, rendering these policies ineffective Researchers often reference financial integration data to indicate de facto restrictions on capital transactions, but distinguishing between de jure and de facto controls remains challenging To address these limitations, Chinn and Ito (2007) developed the KAOPEN index, which combines the extent and intensity of capital controls based on AREAER data.

A O P E N isc r e a t e d byt h e m i x c a l c u l a t e d off o u r v a r i a b l e s ( z 1 , z 2 , z 3 , z 4 ) t h a t standfor:(z1)theimposingvariedexchangerates;

(z3)b a r r i e r i n c a p i t a l a c c o u n t t r a n s a c t i o n s ; a n d ( z 4 ) r e q u i r e m e n t i n sur renderofexportproceeds,respectively.Inotherwords,KAOPENisafunctiono f 4va riables(z1,z2,z3,z4).KAOPENscorestheleveloffinancialliberalizationasa g r a d e (min:-

The KAOPEN index ranges from 0 to 1, where a value of 0 indicates a completely closed economy and a value of 1 signifies full openness Researchers argue that focusing on the intensity of capital controls is a key strength of the KAOPEN index, as it can reflect more nuanced restrictions For instance, a country may be classified as having an open capital account while simultaneously imposing certain limitations on current account transactions or implementing a multi-exchange rate policy Thus, KAOPEN measures not only the openness of the capital account but also the current account and requirements related to multi-exchange rates and the surrender of export proceeds.

TheKAOPENmeasureischosentoproxyforfinancialliberalizationinthisstudy,b e c a u s e itisoftenusedtoproxyforfinancial liberalization recentlyasAlmekinderse t a l ( 2015).F u r t h e r m o r e i t i s a v a i l a b l e a n d u p d a t i n g d a t a , i n s t e a d o f Q u i n n ’ s CAPITALhasstoppedupdatingattheyear2004,sothatQuinn’sCAPITALcoul dn o t beusedinthisstudy.

KAMeasure

(2011)statesthatSchindler(2009)KAi n d e x maybet h e mostf i n e l y g r a d a t e d o f t h e A R E A E R t e x t measures,s i n c e i t includesseveralsidesofthecapitaltransa ctions.However,inthisindextherearenod a t a f o r somec o u n t r i e s s u c h a s C a m b o d i a, Myanmar,L a o P D R a n d j u s t s t a r t a t year1995.

SHAREMeasure

The International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) provides a standardized method to analyze the degree of capital account liberalization for each country This analysis involves calculating a variable that indicates the proportion of years a country has liberalized its capital accounts For example, if a country liberalized its capital markets in five out of ten years, it would receive a value of 0.5 However, challenges arise in determining whether these liberalizations occurred in the first five years, the last five years, or during the middle five years of the ten-year period This issue is particularly relevant in cases where countries experience cycles of "closing" and "opening" their capital markets.

Insummary,as aforementioned,KAOPENmeasure ischosentoproxyforfinancialliberalizationinthisstudy.Becausethisisavailableandupda tingdata,insteadof

Quinn’sCAPITAL hasstoppedupdatingatthe year2004, sothatQuinn’sCAPITALcouldnotusedinthisstudy.SimilarlySchindle(2009)index,KAisnotc h o s e n be causeithasnodataforCambodia,Myanmar,LaoPDR.

EndogenousProblemfromtherelationship betweenFinancial LiberalizationandEconomicGrowth……………………………………………………………………………… …………………… 3536 1.InstrumentalVariables

(2013)arguethattherearesomecriticismsduetopotentialendogeneity probl emsintheir study.Nevertheless, it has proven tobeverydifficultto d e a l w i t h t h e s e problemsi n a p e r s u a d i n g a n d s a t i s f y i n g w a y w h i c h i s c o r r e s p o n d i n g t o t h e s t r a n d o f l i t e r a t u r e T h e samei d e a s , B e k a e r t e t a l

( 2 0 0 5 ) f i g u r ed outthataswiththecausalitybetweenfinancialliberalizationandeco nomicg r o w t h , e n d o g e n e i t y p r o b l e m s l o o m l a r g e Whetherl i b e r a l i z a t i o n d e c i s i o n i s a n e x o g e n o u s politicalresolutionorthecountriesmadeana ttempttoliberalizewhentheyawaittheimprovedgrowthopportunities?

Identifyingendogeneityproblemsint h i s situationisdifficultbecauseitisnearlyimpossible tofindarelevantinstrumentf orliberalization.A remedy istryingtodirectlycontr olforgrowthopportunities N e v e r t h e l e s s , thisisadifficultassignment.Anyl ocalcorrelatedvariablethathaveth e r ela ti on sh ip w i t h g r o w t h o p p o r t u n i t i e s c o u l d i n d i c a t e ani n c r e m e n t i n g r o w t h o p p o r t u n i t i e s becauseoftheplannedfin ancialmarketliberalization.Forthisreason,includingthegrowthopportunityvariableintoth eregressionisnotinformative.

The Exogenous Growth Opportunities variable, denoted as GO, represents a solution based on the analysis of industries with time-varying growth prospects within each country's economy It is assumed that the price-to-earnings (PE) ratios of global industry portfolios reflect these growth opportunities By integrating the PE ratios with the three-digit Standard Industrial Classification (SIC) and the United Nations Industrial Development Organization (UNIDO) data, we create an implied measure of growth opportunities for each country.

( 2 0 0 5 ) s h o w t h a t w h e n t h e G O v a r i a b l e i s a d d e d i n t o a g r o w t h re gression, the GOmeasureissignificantintheregressionshowsthatthis isagoodmeasureo f g r o w t h o p p o r t u n i t i e s C o m p a r i n g t h e r e s u l t s f r o m g r o w t h e f f e c t ofliberalizationintheregressionthatisaddedtheGOvariable( 0 9 2 % ) w i t h t h e o r i g i n a l e f f e c t t h a t i s w i t h o u t a d d e d GO( 0 9 7

% ) , b o t h t h e c o e f f i c i e n t a n d i t s statisticalsignificanceareessentiallyunch anged.Itisnotlikelythatthisanalysismethodcompletelyresolvetheendogeneitypr oblem,butitgivesmoreconfidencethattheresultsarenotbeingdrivenbyanendogeneit yissue.

In 1998, it was highlighted that the legal origin of countries can serve as appropriate instrumental variables (IV) for financial development, helping to control for potential simultaneity bias Legal origin is not only exogenous to economic growth but also correlated with financial development Legal systems are classified into four main categories: English common law, French civil law, German civil law, Scandinavian civil law, and those with communist or Islamic legal origins The influence of European legal systems, shaped by history and colonialism, has spread across the globe, with the English legal system reaching many Asian and African nations, as well as New Zealand, Australia, and North America Similarly, French civil codes were disseminated to regions like Indochina, various African countries, and the Caribbean through colonization.

InthecaseofGermancivilcode,thisnotonlyhadinfluenceonChinaa n d Taiwan,butalso hadthestronginfluenceontheJapaneseCivilcodeandfromtheretheGermanlegaltradi tionspreadtoKorea.

The legal originmateriallyhelps tobuild thelegalenvironment ingeneraland legalenvironmentw i t h r e s p e c t t o i n v e s t o r p r o t e c t i o n i n p a r t i c u l a r

Whent h e f o r e i g n investorsd i r e c t l y e n g a g e inthelocaleconomies,itcould leadtoimprovethefinancialreformsand hencelessenfinancialconstraintsandtheexternalfinancecostofcapitalpremium.Iti s likelyt h a t f i n a n c i a l r e f o r m e n h a n c i n g t h e l e g a l e n v i r o n m e n t a n d investorp r o t e c t i o n arethegenuinesourceofgrowth.Ingeneral,agoodlega lenvironmentcouldpromotestablestateofGDP.

TheE n g l i s h l e g a l s y s t e m i s d i f f e r e n t f r o m o t h e r c i v i l l a w c o u n t r i e s , s i n c e t h e E n g li sh l e g a l s y s t e m i s r e l i e d onc o m m o n l a w , whi cht h e l a w s w e r e f o c u s o n resolvingparticularcircumstances.Incomparativ ely,theEnglishlegalsystemperformsthe go od institutions,propitiousinvestm entprofilefor foreigninvestors a n d higherinvestorprotection.Furthermore,Fre nchlegalorigincountriesarer e l a t i v e l y weakintherightsofshareholdersandcr editors.Inaccountingstandardasp ect, thatisshowedbycompanyfinancialsta tements,Frenchlegaloriginc o u n t r i e s comparativelyhavethelesscomprehensivecom panyfinancialstatements.

MeasurementofVariables

Dependentvariable

InmanyempiricalstudiesthedependentvariableY,denotestheeconomicgrowth r a t e ThevariableGrowthequalstherateofrealpercapitaGDPgrowth,whichi stheunderlyingdataarefromthenationalaccounts.Theeconomicgrowthalsocouldbemeas uredbyp r o d u c t i v i t y g r o w t h , w h i c h b u i l d o n t h e n e o c l a s s i c a l p r o d u c t i o n f u n c t i o n w i t h c a p i t a l ( K ) , t h e l a b o r ( L ) , a n d t h e l e v e l o f t o t a l factorp r o d u c t i v i t y (A),andthecapitalshare(α),thentheaggregateoutputisgivenasfollows:

Due to the challenges in calculating the capital share (α), many studies utilize the growth rate of GDP per capita as a key dependent variable Gross Domestic Product (GDP) is widely recognized as a primary indicator of a country's total economic production GDP per capita serves as a crucial economic metric, representing the average value of all goods and services produced per person in an economy, thus reflecting social and economic changes By measuring GDP divided by the population, researchers gain valuable insights into economic well-being Since total output correlates with total income, income per capita can sometimes substitute for output per worker or labor productivity Consequently, economists and various social scientists often regard GDP per capita as the preferred initial measure of economic growth, as highlighted in this study following Bekaert et al.

Y i,t =ln((GDP i,t /POP i,t )/(GDP i,t-1 /POP i,t-1 ))

IndependentVariables

Chinn& I t o ( 2 0 0 7 ) d e v e l o p e d t h e n e w c a p i t a l a c c o u n t o p e n n e s s i n d e x , w h i c h i s c al l ed KAOPEN,basedonAREAERtabulationwiththeaimofcombinationin thee x t e n t andintensityofcapitalcontrols.Inthisstudy,insteadofQuinn’sCAPITAL,

K A O P E N indicatorischosentoproxyforfinancialopenness,becauseitcover sap er i o d timefrom1970to2013 andis available.WhileQuinn’s CAPITALdatastopa t theyear2004.Usually intheregressionestimation,Quinn’sCAPITALindicatorg i v e s theresultmoresignifica ntthanKAOPENindicator.

Asa b o v e mentions,KAOPENmeasureisc h o s e n top r o x y forf i n a n c i a l lib eralizationinthisstudy.Becausethisisavailableandupdating data,insteadof

Qu in n ’ s CAPITAL hasstoppedupdatingatthe year2004, sothatQuinn’sC

APITALcouldnot usedinthisstudy.SimilarlySchindler(2009) index:KAisnotc h o s e n becauseithasnodataforCambodia,Myanmar,LaoPDR,andKA juststartfr om year1995.

Inthesimpleconditioninginformationsetincludesthelogarithmofinitialrealperc apitaGDPtocontrolforconvergenceand,thepoorcountrieswhichthatlowGDPlevelsp romisehighergrowthrates(Bekaertetal.,2005).

Government consumption as a percentage of gross domestic product (GDP) reflects the total current expenditures by the government on goods and services, including employee compensation Economic theory suggests that government spending significantly impacts economic performance Many economists argue that in certain scenarios, reducing government spending can enhance economic growth, while in others, increased spending may yield positive effects When government spending is nonexistent, economic growth is likely to be minimal, as essential functions such as enforcing contracts, protecting property rights, and developing infrastructure would be severely hindered without government involvement.

Secondaryschoolenrollmentratiois theratiooftotalenrollment,irresponsive ofa g e , tothepopulationoftheagegroup.Secondaryschoolenrollmentratioistheoneo f i n d i c a t o r s t o measuree d u c a t i o n q u a n t i t y t h a t i s o f f i c i a l l y c o r r e s p o n d s t o t h e secondarylevelofeducation.Theotherindicatorscanbeusedtomeasureeducatio nq u a n t i t y suchastheaverageyearsofschooling,adultliteracyrate,andedu cationspending.Manyresearchersbelievethattherearethepositiveassociationsbetween e d u c a t i o n quantity andeconomicgrowth.Moreover, laborforce quality b asedoninternationalmathematicsandsciencescoresarestronglyrelatedtoeconomicg r o w t h Sincethat,improveinthequantityandqualityofeducationleadtoeconomic growth.

ThisisGrowthrateoftotalpopulationwhichcountsallresidentswithoutdistinctionofl e g a l s t a t u s o r c i t i z e n s h i p A c c o r d i n g t h e s t a n d a r d n e o - c l a s s i c a l g r o w t h m o d e l d ev el o p ed bySolow,thestateoftheeconomywould beseparatedintotwocasesthes t e a d y s t a t e a n d t r a n s i t i o n a l e f f e c t s I n t h e c a s e o f s t e a d y s t a t e , t h e h i g h e r p o p u l a t i o n growthwilldecreas eincomepercapita,butwillhavenoeffectonpercap it al incomegrowth.These leadtotheresultthattherateofpopulationgrowthw o u l d improveeconomicgrowt h.Intheprocessof transitiontothesteadystate,theh i g h e r populationgrowthhasanegativeimpactonpercapitae conomicgrowth.

(2005)arguethattherearesomemodelspopulationgrowthcouldhaveasignific antnegativesign,butintheothermodelsw i t h OLSstandarderrors,thepopulationgro wthhasinsignificant.

Lifee x p e c t a n c y at b i r t h i n d i c a t e s t h e p r o b a b l e n u m b e r o f yearsani n d i v i d u a l orc l a s s ofpersonswouldliveifprevailingpatternsofmortalityatthetimeofitsbirt hwerenottochangethroughoutitslife.Lifeexpectancyisdetermined statisti cally,af f e ct ed bysuchfactorsasoccupation,nutrition,heredity,andphysicalcondition…

T h e r e isacausaleffectoflifeexpectancyoneconomicgrowthbytheroleofthe de m o g r a p h ic transition.Accordingto thetheory,itcouldbeforecastthatther eisp r i m a r i l y increasep o p u l a t i o n b e f o r e t h e d e m o g r a p h i c t r a n s i t i o n i m p r o v e m e n t s i n l if eexpectancy.Improvementsinlifeexpectancywouldleadto reducepopulationg r o w t h andencouragehumancapitalaccumulationafterthebegi nningofthed em o g rap h ic transition.Inaddition,asufficientlyhighlifeexpectancycond uctsthetriggerofthetransitiontosustainedincomegrowth.

Diisdummyvariablestoseparatecountriestothelegalorigin.dlegal1ifEnglishcommonlaworigincountries.d legal =0ifFrenchc ivillaworigincountries.

(1998)statethattocontrolforp o t e n t i a l s i m u l t a n e i t y b i a s , t h e l e g a l o r i g i n o f e a c h c o u n t r i e s c a n b e u s e d a s appropriateinstrumentvariables (IV)for grow model,sincelegalorigin havenotonlyt o b e e x o g e n o u s t o economicg r o w t h b u t a l s o b e c o r r e l a t e d w i t h f i n a n c i a l d ev el o p m en t

FinancialLiberali zation KAOPEN indicator kaopen1 Positive

ControlVariables LogarithmofInitialGDPiny ear1990 lgdp90 Negative

DummyVariable legalorigin Dlegal binarynumber Positive

Datacollection…………………………………………………………………………………………………….4 4 3.6.ModelSpecification

Thiss t u d y e x p l o i t s e i g h t v a r i a b l e s t o e s t i m a t e r e g r e s s i o n mod el,i n c l u d i n g t h e g r o w t h rateofrealGDP percapita.Thesetdataofcontrolvariablesinthisresearcharem a i n l y g a t h e r e d fro ml i s t o f a v a i l a b l e c o u n t r i e s fromWorldD e v e l o p m e n t In d i cato r s ofWorldB ank’sdatabaseintheperiodof1990to2013.Unfortunately,a l l countriesdo not havesufficientdataforallyears.Forexample, severalvariablesa r e lackedofobservationsinsomeyears,especiallymeasuresthesecon daryschoolenrollmentratioandgovernmentconsumption.Thisisscattermissingdata.

FinancialliberalizationindicatorisKAOPEN1collectedfromthewebsiteofChinn.Retrieve donMarch20,2015from:h t t p : / / w e b p d x e d u / ~ i t o / C h i n n -

Thecol lec te d samplec o n t a i n s 10 memberc o u n t r i e s of A S E A N i n2 4 year,from

Thissect io nc once nt ra tes on e c o n o m e t r i c ap p r o a c h es a n d e s t i m a t i o n strat egiestoanswerresearchquestions.Todothis,thestudyapplythemodelthatbase onthemodelofBekaertetal.

Y=βX0+βX1kaopen1+βX2lgdp90+βX3gconsum+βX4second+βX5Pop

+βX6llife+βX7dlegal Generally,T h e P o o l e d O L S , F i x e d e f f e c t s method( F E M ) a n d R a n d o m e f f e c t s model(REM)arethreecommonmethodsestimatingmodelsforpa neldata.Becauseo f t h e d i f f i c u l t y inf i n d i n g i n d i c a t o r t h a t i s p r o x y f o r f i n a n c i a l liberalization,inthisstudyj u s t u s e s o n l y oneindicator,KAOPEN1p r o x y f o r f i n a n c i a l liberalization.Sothatjustonemodelisapplied.Thetechniqueestimationist hePooledOLS,Fixedeffectsmethod(FEM)andRandomeffectsmodel(REM).

ChapterRemarks…………………………………………………………………………………………………4 5 CHAPTER4:RESEARCHRESULTS

Insummary,thediscussinginthischaptertendtofindoutandchoosetheapproxim atee mp ir ica l model,t h e variables, a n d thed a t a collection t h a t applying f o r thisstudytoexaminetheassociatedbetweenfinancialliberalizationandecono micg r o w t h A s mentiona b o v e , t h e c h o s e n m o d e l i s i n l i n e w i t h modelo f B e k a e r t etal.

(2005) Thevariablethatp ro xy forfinancialliberalizationisKAO PE N1 , t hisisdevelopedbyChinn&Ito(2007).Theestimationmethodsarep o o l ed OLS,randomeffectmodel(REM),fixedeffectmodel(FEM)areapplied,a n d theex pectedresultisthesignificantpositivecoefficient ofKAOPEN1,suggestingt hatfinancialliberalizationspurseconomicgrowth.

Thischaptercontainstwomainsectionsoneisdiscussingtheglanceattheeconomic growthandfinanciall i b e r a l i z a t i o n i n A S E A N countriesi n t h e timep e r i o d 1 9 9 0 s t o 2 0 1 5 T h e n e x t p a r t i n t r o d u c e s i s s u e s r e l a t e d tot h e v a r i a b l e s statistic,thecorrelationamongdependentvariablesandexplanatoryvari ables.Thisa i m s tosketchthegeneralpictureofobservationsample,therelation shipbetweenvariables, andtheestimationtechniquetofacewiththeseissues.Fina lly,empiricalresultanddiscussionarerepresentedindetailinthissection.

OverviewEconomicGrowthandFinancial LiberalizationinASEAN…………………………4 6 1 OverviewtheeconomicgrowthinASEANin theperiod1990–2013………………….4 6 2 ForeignDirectInvestment(FDI)InflowsintoASEAN……………………………………………4 8 3.ASEANBankingSector…………………………………………………………………………………………5 1

Capital accountopennessinASEAN countries ………………………………………………….5 3 4.2DescriptiveStatistics …………………………………………………………………………………………….5 6 4.3.ModelEstimationResult …………………………………………………………………………………….6 4 4.3.1.ResultofTestforPanelDataModel

( 2 0 1 5 ) d e m o n s t r a t e t h a t S i n g ap o r e hasperformedathighscoreoffinancia lopennessfromtheearly1980s,w i t h havesomerestrictionsappliedaroundthetimeof Asianfinancialcrisis(AFC)1 9 9 7 andquicklybeuntiedafterthat.Asoneofthelarge stfinancialcentersinthew o r l d likeHongKongSAR,Singaporeisthemostdevel opmentcountryinA S E A N , p la yi ng adominantrolein t he regionalfinancia lintegration ASEAN-

4c o u n t r i e s (including:Indonesia,Malaysia,thePhilippines,andThailand)haveimp osedsomerestrictionsonbuyingandsellingdomesticsecuritiesby

Figure 4.6 Financial liberalization in ASEAN-4, Singapore and Viet Nam

Indonesia Malaysia Philippines Singapore Thailand

-1,5 nonresidents.T h i s i s e x p l i c i t t h e r e l a t i v e h i g h c o n t r o l l i n g i n t h e l e v e l o f c r o s s b o r d er p o r t f o l i o f l o w s I n a d d i t i o n , t h e r e a r e somer e s t r i c t i o n s i n c a p i t a l a c c o u n t transactionsappliedforresidents.Figure4.6showsthatt hetrendofASEAN-

4ismaintainedt h e c o n t r o l l i n g i n l o c a l f i n a n c i a l markets,o r e v e n i n t e n s i f i e d somerestrictionsoncurrentaccounttransactionsasthecaseofIndones ia,thathasmorerestrictionsafter2010.

Source:A u t h o r ’ s s e l f s u m m a r y f r o m (Chinn& Ito)I n d e x Retrievedo n March2 0

, 2 0 1 6 from:http://web.pdx.edu/~ito/Chinn-Ito_website.htm

Figure 4.7 Financial liberalization in some Asia countries and Viet Nam

0,5 Vietnam Cambodia Lao PDR Myanmar China

Source:A u t h o r ’ s s e l f s u m m a r y f r o m (Chinn& Ito) I n d e x Retrievedo n March2 0 , 2

0 1 6 from:http://web.pdx.edu/~ito/Chinn-Ito_website.htm

Figure4 7 s h o w s t h a t c o m p a r i n g w i t h o t h e r A s i a c o u n t r i e s K o r e a R e p h a s b e e n acceleratedinupwardtrendtofinancialopennessuntil2007andstoodatthisl evelu n ti l 2 0 1 3 Chinadonotshowanychangeovertime.Cambodiahashad ajumpintou p wa r d trendandbecomethesecondmostfinancialopennessinASEAN.Thele veli s onlylowerthanSingapore.However,Almekindersetal.

(2015)pointedoutthati n thecaseofCambodia, capitalflowsismostlyinFDIan dofficialaids.Recent years,Myanmarhashadthenewstepsinliberalized the irfinancialopenness andu n i f i c a t i o n oftheexchangerate,butthisisnotyetreflectedi ntheChinn-Itoindex.

AccordingtoLevineet al.(2000),Bekaertet al.(2005)ingrowthregression model,therearethepotentialofnonlinearrelationsbetweeneconomicgrowthandfinanciall iberalizationaswellasothereconomicindicators.Sincethisreason,growthmodelshouldbe ttertakethenaturelogarithmsoftheregressors.

VARIABLENAME Obs Mean Std.Dev Min Max

Control Variables: lgdp90 (Logarithmof initialGDP) 192 7.117 1.656 4.585 9.525 gconsume (Governmentconsumption)% 203 11.084 5.407 3.460 29.867

Moreover,thehistogramsofvariablesprovethattherawdatacollectfromWorldB a n k ’ s s o u r c e maybecontaminated,for thedata couldbemeasuredwith error,andthe observationinevery countrylikelytobeviewedasanindependentdraw.Whenth e variablesaretransforme dintologarithm,itmaybecontributedtoreducingthestandarderrorsofthesample… thetable4.1followingreflectsthesummarystatisticsforallvariablesinthisresearch.

Asp rese nt in g inth eT ab le( 4 1), ave ra ge g r o w t h r a te o f A S E A N cou nt ri es equ al e1.418( = 2 7 1 8 2 8 1.418)=4.13%,andthegapbetweenthelargestandsmallestvalueofgro wth rateislarge,thisgapcanbeillustratebysituationofIndonesiakeepingtheminusg rowthrateat-

14.35%inyear1998,andthehighestgrowthrateofSingaporein2010at13.22%.Th islargegapexhibitstheincomelossintheperiodofAsia financialcrisis1997.Mostofhigher incomecountriesinASEAN facewiththede cr easi ng i n e c o n o m i c g r o w t h a n d th e g r o w t h ra te o f G D P g o t t h e neg at ive number.However,inthesmallgroupoflowerincomeincludingViet Nam,Cambodia,Laos,MyanmarstillgainedthepositivegrowthrateinGDP.

Int h i s t a b l e , t h e f i n a n c i a l l i b e r a l i z a t i o n i n d i c a t o r a l s o emergesa s n o t i c e a b l e o n e thatrunsfromthelowesttohighestofthe index,equivalent withde gree 0and1r esp e ct i v e l y i n o t h e r i n d e x o f C h i n n ( K A O P E N 2 ) T h i s m eanst h a t w h i l e s o m e c o u n t r i e s keepclosingfinancialmarketabsolutely,s omeothercountriesadvocatef u l l y o p e n n e s s financialmarket.Theaverageof financialliberalizationinthesamplej u s t g a i n t h e d e g r e e -

0 0 6 1 ( e q u i v a l e n t s 0 3 s c o r e o f K A O P E N 2 ) T h i s s h o w s t h a t , in overall,the degreeoffinancialliberalizationin allASEAN nationsisl o w e r thanthe0.5medium.Thecountries oftheASEANstillholdthe controlinf i n a n c i a l market.

Thecorrelationamongdependentvariableandfinancial liberalizationindi catoris illustratebytheline–scatterdiagramsasbelow

Astheaforementioned, financialliberalizationis thecontroversialtopici nrecent years,b e s i d e t h e mains t r e a m l i n e o f l i t e r a t u r e a d v o c a t e f o r f i n a n c i a l o p e n n e s s , somescholarshavetheoppositeideas.Manyempiricalstudies pointoutthesignificantevidentthatspurtoeconomicgrowth, theotherstudi esco ul d notfinda n y r e l a t i o n s h i p b e t w e e n f i n a n c i a l l i b e r a l i z a t i o n a n d e c o n o m i c g r o w t h A s p r e s e n t e d inaboutline- scatterdiagram,inthissample,findinganunclearlycorrelationb e t w e e n f i n a n c i a l a n d e c o n o m i c g r o w t h T o p r e s e n t mored e t a i l t h i s r e l a t i o n s h i p , thescat terdiagramsforeachcountriesaredrawingasbelow

IntheChinn’sindicatorforfinancialliberalization(KAOPEN),therearenodataforB r u n e i D arussalam,forthisreason,thescatterdiagramforthiscountrycouldnotbed r a w n E x c e p t i n g t h e c a s e o f B r u n e i Da r u s sa l a m , A S E A N r e m a i n s n i n e membercountries.I n g r o u p o f n i n e , t h e r e a r e f i v e countries( C a m b o d i a , I n d o n e s i a , L a o s , Mala ysiaandThailand)havepositiverelationshipbetweenfinancialliberalization a n d economicgrowth,threecountriesincludingVietNam,PhilippineandMyanmari n gro upthathavenegativeeffectoffinancialliberalizationoneconomicgrowth.

H o w e v e r , Singaporethereisanunclearlyevidencetoprove thecorrelationbetweenf i n a n ci al l ib er al iza ti on a n d g ro wt h I t ne eds t o g i v e a s c r u t i n y reviewi nt h e da ta samplet o m a k e morec l e a r l y t h i s c o n s e q u e n c e T h e f i n d i n g l i k e l y tob e byt h e r e a s o n t h a t S i n g a p o r e a l r e a d y h a s b e e n s c o r e d a t t h e h i g h e s t p o i n t i n K A O P E N i n d e x , andovertimefrom1990to20 13theirmarkinleveloffinancialliberalizationstillunchanged,itcouldnotincreasemore, whilethegrowthratechangeovertime.B e c a u s e o f t h i s , t h e d a t a i n t h e s a m p l e c o u l d n o t p r e s e n t anyc o r r e l a t i o n i n t h i s situation.

The scatter diagrams provide a detailed view of the correlation between the dependent variable, Ln(Growth), and various control variables While some diagrams align with existing literature, others reveal contrasting relationships, such as those between secondary school enrollment and life expectancy.

Discussingaboutsecondaryschoolenrollmentvariable,manyscholarsbelievethatt h e r e arethepositiveassociationsbetweeneducationsbetweeneducationquan titya n d economic growth a n d laborf o r c e quality basedo n i n t e r n a t i o n a l m athematicsa n d sciencescoresarestronglyrelatedtoeconomicgrowth.Sincethat,i mproveint h e q u a n t i t y a n d q u a l i t y o f e d u c a t i o n l e a d toe c o n o m i c g r o w t h H o w e v e r i n t h i s scatterdiagrampresentthenegativeeffectoneconomicgrowth.I nthiscase,somel a c k ofdataindatasetofWorldBankmaybethereasonforthisco ntrary.InthedatasetofWorldBank,sometimethelosingdataofsecondaryschool enrollmentv a r i a b l e appearinsomeyear,whileSingaporelacksthisdataforallthetim eperiodo f thesample.

Life expectancy is influenced by various factors such as occupation, nutrition, heredity, and physical condition, with wealthier countries typically providing better nutrition, housing, and medical services that contribute to longer, healthier lives This correlation suggests that higher life expectancy can drive sustained income growth However, data reveals an anomaly in Vietnam, where life expectancy exceeds 75 years, alongside countries like Singapore and Brunei While this aligns with expectations for the latter two, it challenges assumptions about Vietnam's status as a poorer nation Despite its economic challenges, Vietnam demonstrates strong performance in nutrition and healthcare compared to other developing countries, contributing to its higher life expectancy.

Y kaopen1 lgdp90 gconsume second pop Llife Dlegal

Y 1 kaopen1 0.1525 1 lgdp90 -0.0059 0.2603 1 gconsume -0.1388 -0.2643 0.5775 1 second -0.4872 -0.1005 0.3572 0.4345 1 pop -0.0277 0.3029 0.0424 -0.128 -0.0982 1 llife -0.0382 -0.0662 0.8025 0.7219 0.4511 -0.1397 1 dlegal 0.1568 -0.0871 0.8317 0.6933 0.0708 -0.1459 0.8194 1

Table(4.2)displaysthecorrelationmatrixamongallvariablesinthesamplepro vi de t h e t e m p o r a r i l y v i e w o f t h e c o r r e l a t i o n o f e a c h v a r i a b l e w i t h a l l r e m a i n othervariablesinthesample,thattherearenothighlycorrelationsamongcontr olv a r i a b l e s andthefinancialliberalizationindicator(KAOPEN1).Thislowcorrelationpro miseagoodresult,thatthereisnomulticolinearityinresearchmodel.

Y=βX0+βX1kaopen+βX2lgdp90+βX3gconsum+βX4second+βX5Pop

+βX6llife+βX7dlegal Int h i s studyj u s t o n e m o d e l i s u s e d f o r e s t i m a t i o n B e c a u s e t h e d i f f i c u l t i n t h e searchingdataf o r t h e opennessindicatort h a t p r o x y f o r financialliberaliz ation.

Someindicesarenotupdaterecently,suchasQuinnaccount,andsomeindexhaven o t c ontaindataofsomeASEANcountries.Becauseofthis,thestudyjustappliesonemo delforestimation.

TheestimationtechniqueappliedtoestimatetheregressionmodelarePooledOLS,F i x e d effectmodel(FEM)andtherandomeffectmodel(REM).Theresultsofthesemodelsaredeta iledintheAppendix

Someoftestsforpaneldataareexaminedtochooseanappropriate modelforther eg r e s si o n model.

Sincethep- valueofHausmanTestforthemeasureoffinancialliberalizationmoret h an 0.05,then ullhypothesiscanbeacceptedatthesignificantlevelof1%.Asaresult,therand omeffectmodelismoreapplicablethanfixedeffectmodel.Forthisr e a s o n , therandom effectmodel(REM)isconsideredasamoreappropriatemodelf o r thisregressionmodel,and(REM)isbetterchoseninthisstudy.

Note:**,***correspondwith5%and10%significancelevel.R–Square

DiscussionontheResearchResult.……………………………………………………………………6 7 CHAPTER5:CONCLUSIONANDRECOMMENDATION

Research Findings on Financial liberalization Indicator:

Generally,Quinn’sindicatorgivesthehighcorrelationwitheconomicgrowththanC hinn’sindicator(KAOPEN).Inspiteofthis,theresultofregressionstillh a s a s i g n i f i c a n t positivecoefficient.Asmentionedintheprevioussection,whenthesigno f KAOPEN1 ispositive,itis provedthatfinancialliberalization havingpositive effect oneconomicgrowth.

Theresults inTable(4 4)displayst ha t, afterestimatedbythefixedeffectmodel ( F E M ) , t h e s i g n o f K A O P E N 1 isp o s i t i v e ase x p e c t e d , s i g n i f i c a n t a t 1 0

(βX1=0.119>0,p=0.099).Thisisnotstronglystatisticallysignificant,butstillisclo setos i g n i f i c a n t Th is p r o v i d e d t h e evi de nt t h a t fi na nci al l i b e r a l iz a t i o n spu rs economicg r o w t h inA S E A N countries, w h e n KAOPEN1 i nc reases 1 u n i t, G D P per c a p i ta l growth rateincrease(e 0.119 =2.71828 0.119 )approximate1.13

Between 1990 and 2013, ASEAN countries faced two significant crises: the Asian financial crisis of 1997 and the global financial crisis of 2007, which originated in the United States and spread worldwide These events have impacted growth rates across many economies, potentially introducing biases in the correlation between financial liberalization and economic growth, as highlighted by Edison et al.

(2004)suggested.Belongtothetimecoveringinthedatasampletheresultofea chstudyisdifferent.Ifthetimecoveringtheboomingthe r e s u l t islikelytobeg o o d foreconomic gr ow th , because d u r i n g t he booming th e economiesgrowat high rates,andmarketsgive high returnstoinvestment projects.O n theoppositesituation,whenthedatacovering therecessionstimeorparticularlyindepressions,thestudiesmaybegatheredtheunexpected results.

(2005),thatisapositiveandstatisticallysignificantcoefficientprovingstrongevidencef orthepositiveeffectsoff i n a n c i a l liberalizationoneconomicgrowth.Theresul tofthisstudyisalsoconsistentwithQuinn&Toyoda(2008)thattheyfindoutall ofsixmodelshave acquireda p o s i t i v e an d h ig hl y statisticallysignificant coe ff ic ie nt, whichsu pp or ts f o r theconceptthatfinancialliberalizationareassociatedwithsubseque ntgrowth.T h e result ofstudyofQuinn &Toyoda(2008)has beenthesameresultsofKlein

&O l i v e i (1999); Bailliu (2000);Edwards (2001); Henry (2007);Bonfigli oli(2008); K o s e e t a l

Financial liberalization positively impacts economic growth by enhancing capital accumulation and competition in banking markets, leading to higher real interest rates and increased savings rates This environment promotes investment by making funds more available through capital inflows from creditors and equity investments Additionally, as financial liberalization facilitates trade integration, local producers can access imported goods at reasonable world prices, reducing production costs and increasing competitiveness in the global market Recent studies emphasize that financial liberalization strengthens total factors of production by promoting knowledge spillover, improved management techniques, and higher technology investments It also reallocates international resources effectively, directing capital from abundant to scarce countries, thereby lowering capital costs and boosting investments This influx of capital enhances productivity growth, as supported by researchers like Henry (2007), Bonfiglioli (2008), and Kose et al (2009), who highlight the collateral benefits of financial liberalization in fostering domestic financial sector development, enforcing macroeconomic discipline, and improving efficiency for domestic firms through increased competition.

FDIintheeconomy.F D I isoneformofcapitalinflowt h a t couldgivenotonlytheforeignca pitalbutalsotechnologytothehostcountries.I t ismoreoftenthannot,FDIcontributesini ncreasingexportindustriesthatleadsc o u n t r i e s a c c e s s i n g moret o t h e w o r l d marketa n d r i s i n g c o m p e t i t i v e a b i l i t i e s Moreover,whenFDIbrings newtechnologies,ittransferstheknowledgespillovero f technologyandmanagementtechn iquethatresultinTFPgrowth.

Int h i s s t u d y , t h e c o l l a t e r a l b e n e f i t o r t h e i n d i r e c t p o s i t i v e e f f e c t s o f f i n a n c i a l liberalizationongrowthisillustratedbytheexperienceofecono micdevelopmentp r o c e s s o f A S E A N c o u n t r i e s , t h a t f i n a n c i a l l i b e r a l i z a t i o n h a v e c o n t r i b u t e d t o t h e economicg r o w t h i n A S E A N c o u n t r i e s , p a r t i c u l a r l y w i t h t h e b e n e f i t f r o m F D I T h r o u g h theabovereviewfocusonec onomicgrowthinASEANintheperiod1990

In 2013, evidence from Almekinders et al (2015) highlighted that foreign direct investment (FDI) serves as the primary channel for financial liberalization in ASEAN, yielding significant benefits for local economies FDI particularly advantages capital-scarce but labor-abundant nations within the region Key benefits include an increase in export volumes, substantial job creation, and enhancements in total factor productivity (TFP), which collectively pressure the need for financial infrastructure reform Consequently, these developments have improved local living standards, lowered unemployment rates, and accelerated poverty alleviation efforts While numerous studies examine the impact of FDI on economic growth, this analysis focuses on its prominent benefits.

FDIt o i l l u s t r a t e f o r t h e c o l l a t e r a l b e n e f i t s o f f i n a n c i a l l i b e r a l i z a t i o n i n A S E A N countries,a n d o n e moretimet o p r o v e t h a t f i n a n c i a l liberalizati onh a v e positivee f f e c t s oneconomicgrowthinASEANcountries.

However,theAsia financialcrisisin1997rekindledthec o n t r o v e r s y betwee ntheco sts andbenefitsoffinancialliberalization,asasayingfromthewritingofKoseeta l

(2010),theystatedthatinrecentyears,oneofthemostintenselydebatedtopicshasbee nthefinancialliberalization,sincethereareseveralstudieshavefoundnocorr elationbetweenfinancialliberalizationandeconomicgrowth,suchasGrilli&F e r r e t t i ( 1 9 9 5 ) ; R o d r i k ( 1 9 9 8 ) ; Kraay( 1 9 9 8 ) o r e v e n f o u n d t h a t f i n a n c i a l liberalizationcouldhaveadverseeffectsoneconomicgrowthasassertedbyHellma nnetal.(2000);Stiglitz(2000).

Inotherwords,asexpected,theresultoftheregressionprovideapositivecoef ficient, a l t h o u g h i t i s i l l n e s s b u t s i g n i f i c a n t e n o u g h t o s u g g e s t t h a t f i n a n c i a l liberalizationhasapositiveassociatedwitheconomicgrowthinASEANco untry,throughthedirectchannels,alsocollateralbenefitsthatarediscussedabove.Thisr e s u l t isalsoinlinewiththeresultofBekaertetal.

(2005).Inaddition,thebenefitsofF DI toASEAN countries arethe goodillustra tionforthe benefits offinancial liberalization.

Research Results for control variables

Table4.4showsthatinthisregressionmodel,exceptsecondaryschoolenrollment( seco nd ), a l l o f c o n t r o l v a r i a b l e s h a v e e x p e c t e d s i g n s L o g a r i t h m o f I n i t i a l G D P (lgdp90),GovernmentconsumptiontoGDP(gconsume),population growth(pop),logarithmoflifeexpectancy(llife),dummyvariablelegalorigin(dleg al)aretother i g h t e x p e c t e d s i g h , thatp r o v e s t h i s r e g r e s s i o n g i v e n t h e r e s u l t s ast h e l i t e r a t u r e pointedout.LogarithmofInitialGDP(lgdp90)hastheinsignifi cantnegativec o e f f i c i e n t (βX 2 =-

0.245,p=0.270)suggeststhatinitialGDPgivingthestandardresultonconditionalconverge nce,thepoorercountriesmaygrowthfasterthanthericher, butthisnotmuchconfident.GovernmentconsumptiontoGDPgiventhenegative si g h (βX3=-

Research indicates that increased government consumption can lead to a decrease in per capita growth rates, although this effect is not statistically significant In some scenarios, lower levels of government spending may enhance economic growth, while in others, higher spending could yield positive outcomes When government spending is nonexistent, economic growth is likely to be minimal, as enforcing contracts, protecting property rights, and building infrastructure become challenging without government involvement This dynamic is particularly relevant in the context of ASEAN countries, as discussed by Almekinders et al.

( 2 0 1 5 ) suggestthatthereishighrequirementinimprovinginfrastructureinu rbanc o m m u n i t i e s , a n d l i n k s b e t w e e n p r o d u c t i o n l o c a t i o n s a n d d o m e s t i c c o n s u m p t i o n centerst o d e v e l o p t h e economies.F o r t h i s r e a s o n , t h e n e e d i s moregovernmentspendingininfrastructuredevelopment.Hence,inthissituationg o v e r n m e n t c o n s u m p t i o n isgoodforeconomicgrowth.Thetrueexperienceisi nrichcountriesthepopulationgrowthislowerthepoorcountries.Itisalsocorrectwiththeres ultofthisstudywhenithasthenegativesigh(βX 5= -

Life expectancy is generally higher in wealthy countries compared to poorer ones, with a positive correlation to economic growth, although this relationship is statistically insignificant Notably, Vietnam, despite being categorized among the poorer ASEAN nations, has achieved a life expectancy comparable to that of Singapore and Brunei, the wealthiest countries in the region, with all three nations boasting life expectancies exceeding 75 years Additionally, the legal origin variable, which categorizes countries based on their legal systems, serves as an instrumental variable in the model, indicating that countries with English legal systems tend to have better institutions, favorable investment profiles for foreign investors, and enhanced investor protection, all of which are associated with higher economic growth However, this variable also shows a positive coefficient that is statistically insignificant.

(2005)assertthatgenerally,thedifferentfromrichordevelopedc o u n t r i e s andt heneverliberalizationcountrieshavesomefeaturessuchas:higherp o p u l a t i o n g rowth,but lowersecondarys c h o o l enrolmentand lowerlifeexpectancy.T h e r e f o r e , t h e s e c o n d a r y s c h o o l enrollment( s e c o n d ) e n t e r e d t o t h e modelwithexpectedhavingapositivesign However, inr egressionresultof thisstudy,ithasthewrongsigh(βX 4= -

(2005)butlessstrongsignificant.Thatmaybehadsomechangesinthedevelopedco untriesfromthe1960sdecade,theassociatedofsecondaryschoolenrollmentisnotmuc hclearwitheconomicgrowth,sincethelevelofeducationhasr i s e n i n n e w h i g h e r l e v e l , a s a w h o l e T h e n e w h i g h e r l e v e l s , f o r example,h i g h s c h o o l enr ol lm en t o r te rt ia ry educationmaybeg i v e n t h e p osi ti ve s i g n i ng r o w t h model.

Inbriefly,exceptthesecondaryschoolenrollment(second)havingthewrongsign,a l l t h e c o n t r o l v a r i a b l e s h a v e t h e e x p e c t e d s i g n c o e f f i c i e n t , s u g g e s t i n g t h a t t h i s regression modeliscorrectedtotheoryof growthmodel.Inadditiontheseresultsof( F E M) model,includingthewrongsign ofs econdary schoolenrollment variable,a r e similarinthesignandthesignifican tlevelstooneofmodelsofBekaertetal.

Thisc h a p t e r p r e s e n t s t h e s u m m a r i z i n g o f m a j o r f i n d i n g s i n t h e studyb a s i n g o n analysisresultsfromprevioussections.Itisalsogivingthesuggestionsf orpolicyimplicationstoenhancefinancialliberalizationinASEANcountries.Inaddition, t h e s t u d y h a s s e v e r a l l i m i t a t i o n s w h i c h m u s t b e o v e r c o m e i n t h e f u t u r e s t u d i e s , t h r o u g h thatsomesuggestionsarepresentedforfurtherstudies,andthatwill presentinthischapter.

Conclusions

Up to now thecontroversybetween thecostsand benefits offinancial liberalizationh a s beencontinuing throughthepasttwodecadesand continuingin thefuture.Thisi s themostintenselydebatedtopicsinrecentyearasKoseetal.

(2010)suggested,f o r thisprovidestheevidencesthatfinancialliberalizationhav ingthebenefitsalsot h e harmstoeconomicgrowth.Inthisstudy,throughtheabovea nalysis,theresultfindingh e r e i s a p o s i t i v e a n d h i g h l y s t a t i s t i c a l l y s i g n i f i c a n t c o e f f i c i e n t , w h i c h p r o v e s thatfinancialliberalizationi sassociatedwitheconomicgrowthinASEANcountries.

(2005),Quinn&Toyoda( 2 0 0 8 ) , thedatasampleandproxyforfinancialliberalizati onaredifferentfromthep r e v i o u s studies.ThisstudyfocusjustonASEANcountries ,thathavetheregion’ss p e c i f i c inhistory,legal,policyandeconomicconditions aresomedifferentfromo t h e r regionintheworld.Moreover,theupdatedperiodco veringin24years,from1 9 9 0 to2013.Despitethedifferenceindataset,theresultisinl inewithstudiesofBekaert etal.

(2005),Quinn&Toyoda(2008)andmoreotherstudiesinthemains t r e a m l i t e r a t u r e t h a t s u p p o r t f o r t h e h y p o t h e s i s , i n w h i c h f i n a n c i a l l i b e r a l i z a t i o n h a v e positiveassociatedw i t h economicgrowth.

Furthermore,t h e e m p i r i c a l f i n d i n g h e r e i s s u p p o r t e d byt h e e x p e r i e n c e int h e economicgrowtho f ASEANeconomies,inw h i c h FDIplaya pivotal role inc o n t r i b u t i n g t o t h e g r o w t h r a t e o f

G D P Asi l l u s t r a t i o n o f g r o w t h i n A S E A N countries,t h i s s t u d i e s a l s o e m p h a s i z e s thec o l l a t e r a l b e n e f i t s o f financialliberalizationcouldbringtotheeconomies,forexamplethrough oneformo f f i n a n c i a l liberalizationthat is FDI.As aforementioned, FDI Could notonlygive thef o r e i g n resourcesbutalsoleadtoincreasinglaborproductivity,arisingstanda rdofliving,reducingunemployment,speedinguptheprogressinfightingpoverty.

Becauseo f t h e a b o v e r e a s o n s , t h e r e s u l t o f t h i s studyisa l s o d i f f e r e n t f r o m t h e resultsofth e studies thatfindno evidence inthenexusbetweenfinan cialliberalizationandeconomicgrowth,suchasthestudiesofGrilli&Ferretti(1995); Rodrik( 1 9 9 8 ) ; K r a a y ( 1 9 9 8 ) H o w e v e r , t h e r e i s t h e n e e d o f c o n c e r n s a b o u t t h e contraryideasthatfinancialliberalizationcouldleadtofinancialv olatile,orevend r i v e tocrisis,asHellmannetal.

In their analysis of the 1997 Asian financial crisis, Stiglitz (2000) highlighted the detrimental impact of massive capital outflows on ASEAN countries, particularly Thailand, Indonesia, and Malaysia He emphasized the need for these nations to focus on managing "short-term speculative capital flows," which can rapidly exit the market, destabilizing the economy Such volatile capital does not support sustainable investment and can lead to property bubbles However, imposing restrictions on these short-term flows could protect longer-term investments, including Foreign Direct Investment (FDI) This study utilizes the KAOPEN index developed by Chinn and Ito (2007) as a proxy for financial liberalization, which has gained recognition in recent research as a reliable measure for assessing financial openness.

E A N c o u n t r i e s T h e prominentofKAOPENthatisconcentratedintheintensity orthestringencyinther e s t r i c t i o n p o l i c y t h a t c o u l d r e f l e c t mores o p h i s t i c a t e d typeo f r e s t r i c t i o n s F o r example,o ne country is inst a t e oft h ec a p i t a l account o pe n n e ss , b u t atthesame time,c a n i m p os e somer e s t r i c t i o n s t o limitc u r r e n t a c c o u n t t r a n s a c t i o n s , o r implementt h e m u l t i - e x c h a n g e r a t e p o l i c y , o r p l a c i n g r e q u i r e m e n t o n s u r r e n d e r e x p o r t p r o c e e d s T h e c a s e m a y h a v e b e e n s i m i l a r w i t h I n d o n e s i a , M a l a y s i a , t h e

Philippines,andThailandw h i l e i m p l e m e n t i n g t h e o p e n n e s s o n c a p i t a l a c c o u n t , g a t h e r i n g moreFDIinflows,butonthesametime,performortieupso mer e s t r i c t i o n oncurrentaccountrestrictionincludinggivingmoreverificationinex portproceedsandservicepayments.

(2005),Quinn&Toyoda( 2 0 0 8 ) using“CAPITAL”ofQuinn(1997)toproxyfor financialliberalization,ins p i t e ofthedifferenceofproxyforfinancialliberalizati on,theregressionresultsoft h i s studyissimilaraboveotherstudiesinprovidingevi dencethatfinancialliberalizationassociatedwithhighereconomicgrowth.Withtheuse dofKAOPENa s proxyforfinancialliberalizationitislikelytobemoreaccuratef orthecaseofA S E A N countries.

Policyimplications

This study provides substantial evidence that financial liberalization contributes to economic growth in ASEAN countries To achieve higher economic growth targets, policies promoting financial liberalization should be implemented As members of the ASEAN Economic Community (AEC), Vietnam and other ASEAN nations must advance towards greater integration in regional and global markets, which includes the financial liberalization process Therefore, adopting financial liberalization is essential for developing these economies However, there are several aspects that require careful consideration during the financial liberalization process.

AsChinn&I to (2 00 5) suggested thatt h e r e a r e three m ai n channels through this fi n a n ci a l liberalization haspositiveimpacttofinancialdevelopment.Thefirsteffectisthisinfluencingtoprotecti onfinancialmarketbylighteningfinancialrestriction,increasingrealinterestrateinth ecompetitivemarketequilibrium( M c k i n n o n ,

1973).Second,itimprovesmoreportfoliodiversificationthathelpstoincreaseriskshari ng.T h e twochannelse f f e c t thathaveresultinreducingt h e costofcapital,h e n c e enhan cemoreinvestments.Thethirdisitseffectson financialinstitutions,int h a t theweakinstitutionsareeliminatedbythecompetition.Forthi sreason,itcouldp ut agreaterpressureontherequirementoffinancialreform.Asthea bovementions,KAOPENiscreatedbythemixcalculatedoffouraspectsofrestricti on,s u c h a s : (i)imposingv a r i e d e x c h a n g e r a t e s ,

Int h e l i g h t o f C h i n n & Ito( 2 0 0 5 ) , C h i n n & I t o ( 2 0 0 7 ) s u g g e s t i o n s a s a b o v e mentioned,toadoptfinancialliberalization,acountryneedtoim posesomemovementsasbelow:Firstly,implementstheuniqueinterestrate.Secon dly,r e m o v e s restrictionsoncapitalaccountalsocurrentaccounttransaction sandthirdly,eliminaterequirementinsurrenderexportproceeds.

Someattentionsinpracticesarethattheprocessoffinancialliberalizationshouldbec o n d u c t e d , butinsmoothlystepstoensuringthedrivetowardsstablemacroeconomi cpolicies,strongmonetaryandfinancialsystemandtrytokeepthep r o c e s s alway sincontrolled.Todothis,needtoincreasethevolumeoftradeandstrengthent h e ba nkingsector.Chinn& I t o ( 2 0 0 5 ) f i n d t h a t t h e p r e c o n d i t i o n f o r c a p i t a l a c c o u n t l i b e r a l i z a t i o n i s t h e l i b e r a l i z a t i o n i n t r a d e t r a n s a c t i o n s , a n d p reconditionf o r e q u i t y m a r k e t d e v e l o p m e n t i s t h e d e v e l o p m e n t int h e b a n k i n g sector.Koseetal.(2006) through severalstudies summarizethe

“threshold”, at thata countycouldyieldthebenefitsoffinancialliberalization.Theyfindmanyc o n t r a r y ideasandthen,theyconcludethatwhenaneconomyismoreopentotradea n d financi alflows,itislikelytobeabletotoleratehigherlevelsofvolatility.Thismeansthe“threshol d” isno meaningfulandapplyfinancialliberalizationgivemoreb e n e f i t s forthenations.

Ina d d i t i o n , a c c o r d i n g t o Stiglitz( 2 0 0 0 ) s u g g e s t i o n , i t i s c l e a r t h a t t h e c o u n t r i e s co u ld a p p l y thei n t e r v e n t i o n t o r e s t r ictingont h e f o r m o f “ short- termsp e c u la t i v e c a p i t a l inflows.”Atthesametime,trytoprovideagoodbusiness environmentforf o r e i g n d i r e c t investment (FDI), becauseFDIcouldgive the host countries notonlyr e s o u r c e s , butalsotechnologies,accessingtoworldmarketandimpro vinghumanc a p i t a l

Inbriefly,tradeopennessanddevelopmentbankingarepreconditionsforfinancialli beralizationprocess.Whena d o p t i n g f i n a n c i a l l i b e r a l i z a t i o n a c o u n t r y n e e d s t o applyingtheuniqueinterestrate,removingrestrictionsoncapitalacco untalsoonc u r r e n t accounttransactions,andeliminatingrequirementinsurr enderexportp ro ceed s Thisprocessshouldbesmoothlyconducted,toensuring thepacestowardsstablemacroeconomicpolicies,strongmonetary andfinancialsystem Inaddition,“short- termspeculativecapitalinflows”musttoreduceorconstrainontheo n e hand,andpromotingFDIinflowsontheotherhand.

Researchlimitations

Theremayhavebeenseverallimitationsinthisresearch.Thefirstconcernbelongt o thevariablethatproxyf o r financialliberalization.Becausetherearesomeindicatorco uldbeu s e d andestimatedinmorethanonemodeltoanalyzingther e l a t i o n s h i p betwee nfinancialliberalizationthen,theresultsaremoreconvincing.

Thesecondproblemisthequalityofdata,forallcountriesdonothavesufficie ntdata forallyears.Forexample,severalvariablesarelackedof observationsinsomeyears,especially measuresthesecondary schoolenrollme ntratioandgovernmentc o n s u m p t i o n Thisisscatteringmissingdatathatco uldberemediedbyfindingindifferent sourcesoutsideWorldBankdatabase.

Thet h i r d i s s u e r o o t s f r o m t h e r e l a t i o n s h i p b e t w e e n f i n a n c i a l l i b e r a l i z a t i o n a n d f i n a n c i a l development.Thisrelationshiploomslargeinth estudiesaboutfinancialliberalization.However,thereisalittlementioningforitinthisst udy.

SuggestionsforFurtherResearch

To enhance future research on financial liberalization, it is advisable to select appropriate indicators or proxies that best fit the study, alongside relevant control variables Additionally, focusing on the interplay between financial liberalization and financial development can make the research more compelling Furthermore, as suggested by Henry (2007), conducting analyses at the firm level rather than the country level may provide clearer insights into the channels connecting financial liberalization and economic growth.

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regress y kaopen1 lgdp90 gconsume second pop llife dlegal

xtreg y kaopen1 lgdp90 gconsume second pop llife dlegal,fe note: lgdp90 omitted because of collinearity note: dlegal omitted because of collinearity

Source SS df MS Numberofobs= 92

AdjR-squared= 0.2553 Total 27.926569 91 306885381 RootMSE = 47805 y Coef Std.Err t P>|t| [95%Conf.Interval] kaopen 119017 0720873 1.65 0.102 -.0243365 262370 lgdp90 -.2448665 2221514 -1.10 0.274 -.6866389 196905 gconsum -.0347552 0371697 -0.94 0.352 -.1086713 039160 second -.0125812 0072168 -1.74 0.085 -.0269325 001770 pop -.0439009 0981865 -0.45 0.656 -.2391555 151353 llife 1.184131 2.049545 0.58 0.565 -2.891614 5.25987 dlegal 5808318 4651991 1.25 0.215 -.3442676 1.50593 _cons -.9830698 8.570817 -0.11 0.909 -18.02708 16.0609

Fixed-effects(within)regression Numberofobs = 92

R-sq:w i t h i n = 0.1772 Obspergroup:min= 2 between=0.0539 avg= 15.3 overall=0.1021 max= 22

F(5,81) = 3.49 corr(u_i,Xb)= -0.6973 Prob> F = 0.0066 y Coef Std.Err t P>|t| [95%Conf.Interval] kaopen1 1977843 0927076 2.13 0.036 0133253 382243 lgdp90 (omitted) gconsume -.0460028 0389569 -1.18 0.241 -.1235149 031509 second -.0155022 0076952 -2.01 0.047 -.0308132 -.000191 pop -.0379303 2374902 -0.16 0.874 -.5104613 434600 llife 8.589342 3.731218 2.30 0.024 1.165389 16.013 dlegal (omitted)

2.540443 sigma_u 50279683 sigma_e 45711002 rho 54748748 (fraction ofvariancedue to u_i)

xtreg y kaopen1 lgdp90 gconsume second pop llife dlegal,re

R-sq:w i t h i n = 0.1322 Obspergroup:min= 2 between=0.5127 avg= 15.3 overall=0.3126 max= 22

Randomeffectsu_i~Gaussian Waldchi2(7) = 38.20 corr(u_i,X) =0(assumed) Prob>chi2 = 0.0000 y Coef Std.Err z P>|z| [95%Conf.Interval] kaopen1 119017 0720873 1.65 0.099 -.0222715 260305 lgdp90 -.2448665 2221514 -1.10 0.270 -.6802752 190542 gconsum -.0347552 0371697 -0.94 0.350 -.1076065 038096 second -.0125812 0072168 -1.74 0.081 -.0267258 001563 pop -.0439009 0981865 -0.45 0.655 -.2363429 148541 llife 1.184131 2.049545 0.58 0.563 -2.832904 5.20116 dlegal 5808318 4651991 1.25 0.212 -.3309416 1.49260 _cons -.9830698 8.570817 -0.11 0.909 -17.78156 15.8154