Determinants of Financial Liberalization in SAARC Region

Abstract

Financial liberalization is the face of financial reforms around the world. This study examines the determinants of financial liberalization in SAARC (South Asian Association for Regional Cooperation) countries. The study considers both political and economic factors as possible determinants of financial liberalization. Data from five countries of the South Asian region (Bangladesh, India, Nepal, Pakistan, and Sri Lanka) over a time span of 48 years i.e. 1970 to 2018 had been analyzed. We selected 1970 as a start point of data as liberalization policies were theoretically advocated for and practically started implementing in the ’70s. The result of panel data estimation shows that among economic factors trade openness, foreign reserves, economic development (GDP growth), and recession predict financial liberalization in the SAARC region. Further, political stability and level of democracy are important political factors in predicting financial liberalization in the region. The country-specific analysis shows some variation from the overall region and is reported in the results section. We also tested for the likelihood of dynamic modeling. However, the result of Arellano and Bond estimation shows that static modeling is appropriate in our context and validates the robustness of our initial estimates. Our study gives useful insights to the policymakers who aim to liberalize the financial markets.