Emerging Market Economies: Liberalization and Performance Nexus

The principal thesis of this paper is that financial development and liberalization affect the growth rate in a significantly positive manner. Deregulation creates an environment that greatly facilitates economic growth. Although there is no consensus on the impact of capital account liberalization on growth, the allocative efficiency hypothesis still holds and it is supported by many analysts. It was believed that capital account liberalization leads to volatility, which led to a support of policy to restrict global capital flows. However, this support was limited. If capital account is liberalized in a planned and sequential manner and if short-term capital flows are liberalized last, and kept under limits, the risk of volatility in the economy declines considerably. Similarly, it was believed by some that liberalization of equity markets causes volatility. However, the equity markets’ volatility was not intensified by financial liberalization. If anything, the opposite was true. The cycles of upswing and down swings in equity markets become smoother after they are liberalized. There are intertemporal differences in the impact of financial liberalization over the equity market. Integration of domestic equity markets in the emerging market economies with the global financial markets contributes to a decline in volatility. (JEL FO, F3, F4, F21, G15