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 significantly narrowed the gap between countries This convergence promotes increased international trade and investment, ultimately lowering costs for consumers and producers alike As a result, the demand for trade intensifies, further driving the process of international economic integration A prime example of this integration is the World Trade Organization (WTO), established through agreements among over 120 economies Similarly, the International Monetary Fund (IMF) now boasts nearly universal membership, with countries committed to adhering 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 a unified economic community similar to the European Union, focusing on a single market and production base, competitive economic regions, equitable development, and integration into the global economy This initiative seeks to transform the ASEAN market into a seamless environment for free trade of goods and services, fostering competition in production and export activities To ensure equitable development, active participation from individuals and firms is essential Additionally, ASEAN's strategic position within the global supply chain presents opportunities for enhanced trade and business growth Core principles of the AEC include the free flow of goods, services, investment, capital, and skilled labor ASEAN has made significant strides in reducing trade duties, with countries like Brunei, Indonesia, Malaysia, the Philippines, and Singapore achieving a 0% tariff rate, alongside similar reductions by Cambodia, Lao PDR, Myanmar, and Vietnam.
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 in the financial sector Current government policies aimed at market control have faced criticism for potentially hindering the efficient functioning and development of financial institutions Professor McKinnon (1973) noted that imperfect capital markets impede growth in developing countries due to fragmented economies and policy measures, which ultimately discourage 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 anticipated, prompting the need to explore the impact of financial liberalization on economic growth Recently, financial liberalization has become a significant concern 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
The ASEAN countries, particularly Vietnam as a member of the ASEAN Economic Community (AEC), are experiencing significant changes due to financial liberalization This study focuses on the effects of financial liberalization on economic growth within the ASEAN region from 1990 to 2013 It aims to explore the relationship between financial liberalization and economic growth, highlighting the potential benefits and unexpected consequences of these policies By strengthening the local financial market, financial liberalization is believed to enhance the overall financial system, ultimately promoting the integration process within ASEAN The expectation is to find positive evidence linking financial liberalization to economic growth, which is crucial for Vietnam's economic development amidst the evolving regional landscape.
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 introduction sets the stage in Chapter 1, followed by a critical literature review in Chapter 2 that explores economic growth, financial development, and the impact of financial liberalization on economic growth Chapter 3 details the regression model and research methodology employed to analyze the effects of financial liberalization Chapter 4 provides an overview of economic growth and financial liberalization within ASEAN countries, including descriptive statistics, analysis, discussion, and study results Finally, Chapter 5 summarizes the main findings, discusses limitations, and suggests avenues 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 compared to another timeframe It is typically measured by Gross Domestic Product (GDP) and Gross National Product (GNP) Nominal GDP includes inflation, while real GDP is adjusted for inflation, eliminating its effects To compare economic growth between countries, GDP or GNP per capita is utilized, accounting for population differences Ultimately, the growth of an economy can be viewed as an enhancement in the 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 as a result of economic activities that foster the creation of new technological knowledge This theory emphasizes the "Schumpeterian" perspective on innovation, highlighting that growth is driven by internal factors 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 version of endogenous growth theory establishes the production function as a critical component in understanding the dynamics of economic growth.
The new production function Y = AK, when divided by labor (L), simplifies to y = Ak, demonstrating that the marginal productivity of capital (A) remains constant despite increases in 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 vital component that directly influences production, thereby enhancing human capital and resulting in a linear increase in output with rising capital stock Furthermore, the AK theory suggests that an economy's long-run growth rate is contingent upon its saving rate; thus, a higher saving rate leads to 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 of financial sector activity and resource allocation efficiency This metric is more beneficial than traditional monetary aggregates, as it provides a clearer view 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 enhanced financial system development Thus, domestic credit to the private sector can effectively represent private credit levels (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 expressed concerns regarding government policies aimed at controlling financial markets, viewing them as detrimental to efficient functioning, financial institution development, and the overall domestic financial market Mckinnon (1973) and Shaw (1973) critiqued these restrictive policies, arguing that government intervention often stems from a desire to mobilize support for domestic economic activities Governments may feel compelled to impose restrictions due to fears of dependence on foreign capital, the need to support state-owned firms, or to prevent domestic savers 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
Levine (1996) discusses how 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 Despite some challenges, financial liberalization has been implemented in various nations, leading to improvements in lending institutions and instruments Over the past two decades, many developing countries have reformed their domestic financial markets in response to both domestic and international developments 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 (Cline, 2010) These indicators can be categorized into three groups: de jure, de facto, and hybrid indicators, with hybrid indicators representing a blend of the first two Many of these 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 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, which highlights the need for a perfectly competitive market Financial liberalization can strengthen local financial markets, leading to more efficient resource allocation, increased foreign investment, and higher savings rates, thus providing opportunities for risk diversification According to Buman et al (2013), the neoclassical perspective, which posits that markets are efficient in allocating scarce resources, underpins much of the liberalization discourse 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 on deposits can be encouraged, resulting in increased savings and subsequent investments, 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 comprehensive analysis covering 108 countries from the 2000 period indicates that financial liberalization plays a significant role in the development of equity markets, 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 than previous studies, which included 60 empirical studies Their findings confirm that financial liberalization positively impacts economic growth, albeit not robustly, suggesting that it is not a singular pathway to achieving strong economic growth To attain higher economic growth rates, countries must focus not only on the industrialization process but also on 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 function of these markets is to collect and process information, particularly in assessing firms and projects with the highest potential returns, while also monitoring the appropriate 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 bankers detect negative economic signals, they often withdraw their investments, a behavior mirrored by other investors who react similarly to perceived risks Additionally, capital market liberalization exposes a country's economic vulnerabilities to external conditions; sudden shifts in lender sentiment regarding "emerging market risk" can lead to significant capital outflows As capital outflows are typically easier than inflows, financial liberalization may result in adverse effects, including increased instability and reduced potential for investment in the economy.
Numerous empirical studies support the theoretical perspectives advocating for financial liberalization Quinn (1997) was among the first to explore the relationship between financial liberalization and economic growth Klein and Olivei (1999) analyzed capital account liberalization using the "Share" indicator, examining data from 82 countries between 1986 and 1995 Their findings revealed a significant impact of capital account openness on financial depth, with a positive correlation between financial development and per capita growth, particularly in developed countries However, the results differed for non-industrial nations, where no evidence was found linking capital account liberalization to economic growth Similarly, Bailliu (2000) concluded 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 in ordinary goods, can yield trade gains through enhanced financial services In countries with imperfect financial markets, services like screening, monitoring, and debt structuring are crucial for firms seeking external capital Just as with ordinary goods, variations in quality and specialization in financial products create demand for trade Financial liberalization can lead to typical trade gains due to these differences across countries and sectors Additionally, the specialization of financial services allows firms globally to acquire them at optimal prices 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), and is further explained by the role of financial liberalization in facilitating international risk diversification As risk-sharing improves, financing for riskier, more productive projects becomes more accessible, 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 1995 study analyzing financial liberalization's impact on economic growth, researchers examined data from 61 countries over the period from 1966 to 1999 The study 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, measured over five non-overlapping five-year periods To assess capital account liberalization, the "share" variable was employed, alongside other comparable variables such as current account controls and a system of multiform exchange rates, sourced from the IMF The findings indicated no evidence that financial liberalizations spur economic growth.
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 used real income per capita as the dependent variable and proxied capital account liberalization with a “Share” indicator The findings indicate no relationship between financial openness and economic growth, nor between financial liberalization and inflation, leading Rodrik 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 As advancements in technology and communications facilitate global capital flows, ignoring government policy, the domestic financial market increasingly integrates with the international market, raising the question of whether countries benefit from accelerating financial liberalization processes.
Theoreticalliterature
EconomicGrowth and GrowthTheory
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 accounts for inflation, while real GDP adjusts for it, providing a clearer picture of economic performance To effectively compare economic growth between countries, GDP or GNP per capita is utilized, taking into account population differences Ultimately, economic growth can be viewed as an enhancement 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, explains long-term economic growth as a product of economic activities that generate new technological knowledge This theory, particularly its "Schumpeterian" perspective on innovation, emphasizes that growth is driven by factors within the economic system rather than external influences Specifically, it highlights the importance of opportunities and incentives for creating technological knowledge The AK model, a foundational version of endogenous growth theory, illustrates this concept by proposing that growth can stem from a constant returns to scale production function.
The new production function Y=AK demonstrates that the marginal productivity of capital (A) remains constant even 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 to scale The AK theory emphasizes capital as a crucial factor that directly enhances production and fosters human capital development, resulting in a linear increase in output with capital stock Furthermore, the AK theory highlights that an economy's long-run growth rate is contingent upon its saving rate; thus, a higher saving rate correlates with increased growth rates, while higher 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 key indicator of financial sector activity and efficiency in resource allocation This metric is more beneficial 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 expressed concerns that various government policies aimed at controlling financial markets are generally viewed negatively, as they hinder efficient functioning, impede the development of financial institutions, and distort domestic financial markets Mckinnon (1973) and Shaw (1973) critiqued these restrictive policies, highlighting the need for governments to intervene in finance to mobilize and support activities expected to develop the domestic economy Such government restrictions often stem from fears of dependence on foreign capital, the necessity to support state-owned firms, or the desire to prevent domestic savers 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
Levine (1996) highlights that the deregulation of interest rates and the loosening of entry policies have facilitated significant financial development, particularly in developing countries where government policy previously suppressed economic management Despite the challenges posed by low-performing lending institutions, many developing nations have undertaken reforms in their domestic financial markets over the past two decades to adapt to both domestic and international developments In essence, financial liberalization refers to the process of opening up 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.
As of 2011, various indicators have been developed to measure capital account openness for most countries worldwide, as noted by Cline (2010) These indicators can be categorized into three groups: de jure, de facto, and hybrid indicators, with hybrid indicators representing a combination of the first two Many of these 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" derived directly 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 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, which posits that markets efficiently allocate resources, underpins many concepts in liberalization This perspective supports the idea that financial liberalization in both credit and capital markets contributes to economic growth By introducing market principles and competition in banking, higher interest on deposits can be encouraged, resulting in increased savings and subsequent investments, as highlighted 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 plays a significant role in equity market development, with trade openness serving as a prerequisite for financial liberalization and subsequent financial development Bumann et al (2013) conducted a meta-analysis involving 60 empirical studies to synthesize the relationship between financial liberalization and economic growth Their findings indicate that while financial liberalization positively impacts economic growth, 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 achieve 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 and capital markets He emphasized that the primary function of these markets is to collect and process information, particularly in assessing firms and projects with the highest return potential, and to monitor the use of lent funds Stiglitz and others contended that financial liberalization does not address issues like asymmetric information, which can hinder efficient financial intermediation in liberalized markets When negative economic signals arise, bankers and investors tend to withdraw their funds, anticipating that others will do the same Furthermore, capital market liberalization exposes a country's economic vulnerabilities to external conditions, leading to significant capital outflows when lenders reassess "emerging market risks." As capital outflows are often more straightforward than inflows, financial liberalization can result in increased instability, ultimately reducing potential investment in the economy.
EmpiricalStudies
Numerous empirical studies in mainstream literature highlight the theoretical perspectives supporting financial liberalization One of the pioneering studies by Quinn (1997) investigates the impact of financial liberalization on economic growth Klein and Olivei (1999) utilize the “Share” indicator to assess capital account liberalization across 82 countries from 1986 to 1995, revealing a significant relationship between capital account openness and financial depth Their findings indicate that financial development positively influences per capita growth, particularly in developed nations, while no evidence supports this effect in non-industrial countries Similarly, Bailliu (2000) concludes that capital account openness fosters economic growth by promoting financial development, focusing exclusively 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 form of market integration in financial services, generating trade gains similar to those seen in ordinary goods In countries with imperfect financial markets, services like screening, monitoring, and debt structuring are crucial for firms seeking external capital Just as with ordinary goods, variations in quality and specialization in financial products create demand for trade Financial liberalization can yield typical trade gains due to these differences across countries and sectors Additionally, specialization in financial services allows firms worldwide to access the best prices and identify suitable financial instruments for new service varieties According to Galindo et al (2007), the growth in Total Factor Productivity (TFP) can be attributed to increased allocative efficiency, while financial liberalization also enhances international risk diversification This improvement in risk-sharing facilitates financing for riskier, more productive projects, 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 this study conducted from 1966 to 1999, covering a sample of 61 countries, the authors investigate the impact of financial liberalizations on economic growth The regression analysis is divided into two sets: one with 181 observations and another with 238 observations The average growth of per capita income is considered the dependent variable across five non-overlapping five-year periods To measure capital account liberalization, the study utilizes a “share” variable, alongside other comparable variables like current account controls and a system of multiform exchange rates, sourced from the IMF The results indicate that financial liberalizations do not necessarily spur economic growth.
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) conducted a study on the impact of capital account liberalization on economic growth, analyzing data from 100 countries, both developed and developing, between 1975 and 1989 His regression analysis, which focused on the percentage change in real income per capita, revealed no significant relationship between financial openness and economic growth or between financial liberalization and inflation Rodrik expressed skepticism regarding the benefits of financial liberalization, suggesting that while macroeconomic policies and financial standards can mitigate risks, they cannot eliminate them He noted that advancements in technology and communication facilitate capital flow across borders, often bypassing government regulations, thus integrating domestic financial markets into the global economy This raises the critical question of whether countries truly benefit from accelerating financial liberalization.
Kraay (1998) concludes that there is no evidence supporting the hypothesis that financial liberalization leads to economic growth His regression model incorporates various indicators for financial liberalization, including "Share" and Quinn’s capital account openness ("CAPITAL"), using output growth 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 for lagged capital account liberalization variables The findings indicate that neither the "Share" nor "CAPITAL" indicators significantly impact growth Kraay attributes the lack of strong empirical evidence for the benefits of financial liberalization to the heightened volatility associated with it Additionally, he notes that countries can only realize the benefits of financial liberalization when supported by appropriate policies and a conducive institutional environment.
Financial liberalization significantly impacts the banking sector, often leading to negative effects on economic growth As competition increases, banks may experience lower profits, prompting them to engage in riskier behaviors, such as gambling on high-yield asset portfolios This tendency can result in substantial losses when these gambles fail, jeopardizing depositor funds and insurer stability The recent surge in financial liberalization, characterized by deregulated interest rates and fewer restrictions on asset choices, facilitates banks' access to risky investments Consequently, this heightened competition diminishes banks' incentives to lend to sound projects, exacerbating moral hazard issues Additionally, the easing of restrictions on various transactions, including derivatives and foreign currency trades, further encourages gambling-like operations within banks Ultimately, financial liberalization fosters intense competition and increases the potential for gambling behavior in the banking sector, raising concerns about the stability and integrity of financial institutions.
ChapterRemarks
Financial liberalization is crucial for economic growth as it enhances local financial markets, leading to more efficient resource allocation, increased foreign investment, and higher savings rates, while also providing opportunities for risk diversification Additionally, it contributes to the development of financial systems, boosts trade volume and services, and raises total factor productivity (TFP), thereby improving the competitive abilities of local countries However, it is essential to recognize the potential negative effects of this process, which require careful management to mitigate risks Despite the inherent risks associated with financial transactions, engaging in globalization remains a significant trend, making the financial liberalization process indispensable This study employs regression estimation techniques to analyze the impact of financial liberalization on economic growth in ASEAN countries, utilizing the KAOPEN index as a proxy for financial liberalization Unlike previous studies, this research focuses on the dynamic Asian region, covering a 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 potential positive effects of financial liberalization on economic growth and development in the long run These studies empirically examine the relationship between financial liberalization and economic growth, often utilizing growth models that incorporate various factors such as investment levels, population growth, education, and initial GDP values as indicators of financial liberalization Researchers, including Becket al., emphasize the importance of these factors in understanding the economic contributions of financial liberalization.
(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, represented by g, can be measured as either total or per capita growth, depending on the model used The variable X indicates financial openness, while Z serves as a control variable Since population growth is exogenous to financial openness, the coefficient for openness derived from a specific model can be utilized in the analysis, regardless of whether total or per capita growth is employed 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, numerous empirical studies have emerged to explore the potential benefits of financial liberalization, particularly its positive impacts on long-term economic growth and development These studies verify the empirical relationship between financial liberalization and economic growth using a growth model However, there are notable differences among these studies, including variations in the country samples, with some focusing on industrial nations while others examine developing countries or a mix of both Additionally, the time periods analyzed differ across studies, which is particularly significant for developing countries that are experiencing recent financial liberalization trends The methodologies and estimation techniques also vary, as researchers may utilize cross-sectional, time series, or panel data approaches Cross-sectional analyses often face limitations such as omitted variable bias and unobserved country-specific effects To address these issues, many authors advocate for the use of dynamic panel data approaches instead of relying solely on cross-sectional data.
Yisdependentvariablewhichcanbeeither,growth,Capitalgrowth,Production ,o rSaving.
Libi;tismainadditiontotheliteratureistoverifyt h e effectofaddinganliberalizationvari able,Libi;t;tothegrowthregression
Research from 2005 indicates that when controlling for other variables, initial GDP can serve as a proxy for a stable state level of GDP, typically showing a negative relationship with growth rates This suggests 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 expanding labor force, it may also lead to a decrease in per capita growth rates In some models, population growth shows a significant negative impact, whereas in others, particularly those 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
The AREAER is a long-term research report by the IMF that investigates changes in global economies by tracking the economic data of over 180 countries This comprehensive analysis is based on various sources, including data collected from official staff visits to member countries and consultations with national authorities The report synthesizes information about rules and restrictions on capital flows, distinguishing between resident and non-resident transaction agents Since its inception in 1950, the AREAER has been published in book format, detailing the laws and regulations that countries implement to govern cross-border financial transactions and the proceeds from these transactions.
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 their 2004 analysis, the authors highlighted a specific row labeled “Restriction on payments for capital transactions” as crucial for understanding a country's capital control regulations This row serves as the foundation for developing an indicator of financial liberalization Additionally, Chinn and Ito (2007) categorized the types of controls on cross-border financial transactions into four groups: multiple exchange rates, enforcement of restrictions on current account transactions, limitations on capital account transactions, and mandatory surrender of export proceeds Their research also pointed out that capital account restrictions, often combined with current account limitations, are frequently utilized to create a dummy variable indicating the presence of restrictions on capital account transactions, a notion echoed by Quinn et al.
In 2011, it was argued that table indicators could be easily converted into level measures, typically represented as binary 0/1 values, and utilized in regression analysis This method has been employed by various researchers, including Grilli & Ferretti (1995), Garrett (1995), Klein (2003), and Edis et al (2004) Since 1997, a new tabular format has emerged, enriching the information presented The post-1997 AREAER structure displays 13 distinct spheres of capital account transactions, highlighting the diversity across countries due to various restrictions This advancement offers more dimensions regarding 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 introduction of a seventh dimension, known as AGR EE, serves to measure the intensity of domestic laws This framework is based on the effects of international legal agreements that limit a nation's activities regarding exchange and capital flows When countries participate in international economic organizations, they typically agree to liberalize certain aspects of their financial markets Consequently, AGR EE can act as an indicator of a government's commitment to refrain 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 likely inadequate for accurately measuring the intensity of capital controls, as it primarily focuses on the rules and restrictions across various countries without capturing the specific nuances of actual capital controls This generality fails to reflect the diverse types of capital control policies, which can often be enforced without clear objectives to manage the volume and type of capital flows Furthermore, private sector evasion of capital account restrictions can render these policies ineffective Consequently, researchers may refer to financial integration data to explain de facto restrictions on capital transactions, though distinguishing between de jure and de facto controls remains challenging To address these limitations, Chinn and Ito (2007) introduced the KAOPEN index, which combines aspects of the AREAER to better assess the extent and intensity of capital controls.
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 measures the degree of capital account openness, ranging from a completely closed economy (min: 2.3) to full openness (max: 8.9) It emphasizes the intensity of capital controls, suggesting that sophisticated restrictions can coexist with varying levels of openness For instance, a country may exhibit a certain level of capital account openness while simultaneously imposing restrictions on current account transactions or implementing a multi-exchange rate policy Thus, KAOPEN not only evaluates capital account openness but also considers current account dynamics and requirements related to 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 for analyzing the degree of capital account liberalization in various countries This analysis involves creating a variable for each country that indicates the proportion of years within a ten-year period during which capital markets were liberalized For example, if a country liberalized its capital markets during five out of ten years, it would receive a value of 0.5 However, challenges arise in determining whether this liberalization occurred in the first five years, the last five years, or during the middle five years of the decade This complexity is particularly evident 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 for assessing economic potential across countries It is defined by analyzing a set of industries that exhibit time-varying growth opportunities within each nation's economy By examining the price-to-earnings (PE) ratios of global industry portfolios, we can gain insights into these growth prospects This analysis incorporates the three-digit Standard Industrial Classification (SIC) system alongside the United Nations Industrial Development Organization (UNIDO) framework, creating a comprehensive 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 suggested that the legal origin of countries serves as appropriate instrumental variables (IV) for financial development, as it is both exogenous to economic growth and correlated with financial development Legal systems can be categorized into four main types: English common law, French civil law, German civil law, and countries with communist or Islamic legal origins The influence of European legal systems, shaped by historical occupation and colonialism, has spread globally For example, the English legal system was introduced to various Asian and African nations, as well as New Zealand, Australia, and North America through colonialism Similarly, French civil codes were disseminated to regions such as Indochina, African nations, and the Caribbean due to 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 dependent variable Gross Domestic Product (GDP) is a widely recognized indicator of a country's total economic production GDP per capita serves as a key economic variable, representing the total value of all goods and services produced in an economy on a per-person basis, which reflects social and economic changes Measuring GDP, divided by the population of a specific country or region, provides an initial assessment of economic well-being Since total output equates to total income, income per capita can sometimes replace output per worker or labor productivity Consequently, economists and various social scientists often prioritize GDP per capita as a fundamental measure of economic growth, as demonstrated 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) is calculated by assessing all current government expenditures on goods and services, including employee compensation Economic theory suggests that government spending has a significant impact on economic performance Many economists agree that in certain situations, reducing government spending can enhance economic growth, while in other contexts, increased spending may have a positive effect When government spending is nonexistent, economic growth is likely to be minimal, as essential functions like enforcing contracts, protecting property, and building infrastructure become challenging 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 visualization of the relationship between the dependent variable, Ln(Growth), and various control variables While some diagrams align with established 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 Wealthier countries typically provide better nutrition, housing, and medical services, contributing to healthier and longer lives, which in turn supports sustained income growth However, an analysis reveals an unusual trend in Vietnam, where life expectancy exceeds 75 years, similar to Singapore and Brunei Unlike these wealthier nations, Vietnam is considered poorer, suggesting that it has achieved a higher life expectancy despite its economic challenges This indicates that Vietnam excels in providing nutrition and healthcare compared to other developing countries.
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
The analysis covers a 24-year period from 1990 to 2013, during which ASEAN countries faced two significant crises: the Asian financial crisis in 1997 and the global financial crisis originating from the United States in 2007 These crises negatively impacted growth rates across many economies, potentially introducing bias in the correlation between financial liberalization and economic growth, as noted 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 has been shown to positively impact economic growth by enhancing capital accumulation and competition, particularly in banking markets, which leads to higher real interest rates and increased savings This influx of capital, whether through creditor or equity investments, boosts the availability of funds for investment Additionally, financial liberalization facilitates trade integration, allowing local producers to purchase imported goods at competitive world prices, thus reducing production costs and enhancing export competitiveness In recent years, it has been emphasized that financial liberalization strengthens production factors by promoting knowledge spillovers, improved management techniques, and higher technology investments This effective allocation of international resources encourages capital flow from capital-abundant countries to those with capital scarcity, ultimately reducing capital costs and spurring investment, which contributes to productivity growth Studies by Henry (2007), Bonfiglioli (2008), and Kose et al (2009) support these findings, highlighting the indirect benefits of financial liberalization, such as fostering the domestic financial sector's development, enforcing macroeconomic discipline, and increasing efficiency for domestic firms through competition with foreign entities.
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 a primary channel for financial liberalization in ASEAN countries, yielding significant benefits for local economies FDI has been shown to enhance capital-scarce but labor-abundant economies within the region The advantages of FDI include an increase in export volumes, substantial job creation, and improvements in total factor productivity (TFP), which collectively drive the need for reform in financial infrastructure Consequently, these developments have elevated living standards, reduced unemployment rates, and accelerated efforts to combat poverty While numerous studies have examined the impact of FDI on economic growth, this analysis focuses on some of its key 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=-
Increasing government consumption may lead to a decrease in the growth rate per capita, although this effect is not significant In certain scenarios, lower levels of government spending could enhance economic growth, while in others, higher spending may have a positive impact When government spending is absent, economic growth is likely to be minimal, as enforcing contracts, protecting property, and building infrastructure become challenging without government involvement This situation is particularly relevant for ASEAN countries, as noted 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, though this relationship is statistically insignificant (βX6=1.184, p=0.536) Notably, Vietnam, despite being classified among the poorer ASEAN nations, exhibits a life expectancy comparable to that of Singapore and Brunei, the wealthiest countries in the region, with all three nations having life expectancies exceeding 75 years Additionally, the legal origin variable (dlegal), used as an instrumental variable, indicates that countries with an English legal system tend to have better institutions, favorable investment profiles for foreign investors, and enhanced investor protection, which are associated with higher economic growth This variable shows a positive coefficient (βX7=0.581, p=0.212), although it remains 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) emphasized the detrimental impact of short-term speculative capital flows on ASEAN nations, particularly highlighting the financial turmoil experienced by Thailand, Indonesia, and Malaysia He cautioned that such volatile capital could lead to property bubbles rather than sustainable investment To mitigate these risks, Stiglitz recommended imposing restrictions on short-term capital while allowing long-term investments, such as foreign direct investment (FDI), to remain unaffected Furthermore, 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 for its effectiveness in measuring 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 rates, policies favoring financial liberalization should be implemented As members of the ASEAN Economic Community (AEC), Vietnam and other ASEAN nations must progress towards greater integration into regional and global markets, which includes the process of financial liberalization Therefore, adopting financial liberalization is essential for developing these economies However, certain aspects must be carefully considered 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 recommended to select appropriate indicators or proxies that best fit the study's objectives, along with relevant control variables from available sources Additionally, focusing on the relationship between financial liberalization and financial development will make the research more compelling Furthermore, as suggested by Henry (2007), analyzing data at the firm level rather than the country level can 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