The Repercussions of Financial Integration on Macroeconomic Performance, Poverty, and Financial Fragility in Developing Economies

This thesis examines the impact of financial integration on growth, poverty and inequality and crises. Chapter 1 surveys the theoretical linkages proposed in the literature between financial integration and growth, poverty and inequality and crises. Chapter 2 examines the impact of financial integration on growth using a panel dataset covering 175 countries over the time period 1970-2013. The Panel Threshold Regression (PTR), Logistic Smooth Transition Regression (LSTR) and OLS estimation methods are deployed. For developing countries, a high threshold level is observed above which increasing openness is severely damaging for growth. On the contrary, for emerging markets, with increasing financial liberalization, growth increases both below and above the threshold. For transition economies, the threshold level is low, but above this threshold increase in financial openness results in decreasing growth. Chapter 3 looks at the impact of financial integration on poverty and inequality using 79 developing countries over the time period 1980-2013. Similar to chapter 2, the PTR, LSTR and OLS estimation methods are used. A low threshold level is found when measuring the impact on poverty, above this threshold it is observed that increasing openness decreases poverty. When measuring the impact on income groups, below the threshold it is observed that income share increases for all income groups, but above the threshold income only increases for the richest 20% and 10%. On the contrary income share decreases for the poorest 10% and 20%. Increased openness also results in increased income inequality. Finally, chapter 4 examines the impact of the intensity of financial liberalization on the likelihood of crises using 93 developing countries over the time period 1980-2013 using multivariate probit regression models. It is observed that increasing the intensity of financial liberalization reduces the likelihood of a banking, currency and twin crises. Improvements in the conditions of political institutions lowers the likelihood of crises but rising political polarization increases the likelihood of crises