SECTORAL IMPACTS OF FINANCIAL LIBERALIZATION IN DEVELOPING COUNTRIES. BY

There is now considerable evidence that financial development enhances per capita income and productivity growth, as surveyed by Levine (2004). However, there is a much less agreement regarding the effects of capital account liberalization and financial development on poor and emerging market economies. This study develops and tests several new models of how financial development affects overall growth and investment by focusing on their implications for different sectors of the economy. For example, Tornell, Westerman and Martinez (2004) argue that financial liberalization disproportionately benefits non-traded goods sectors. This hypothesis has testable implications for real exchange rate movements and for the services and construction sectors. Rajan and Zingales(1998) emphasize that financial liberalization should benefit sectors that rely more on externally financed investment, again a testable hypothesis. We propose to test these and other hypotheses regarding the sectoral impacts of financial liberalization on developing economies using data from a panel of countries over the period 1980 to 2004