Financial Market Liberalization Research Articles

Did we trade freedom for credit? Finance, domination, and the political economy of freedom

This article concerns freedom and financial markets. First, I consider the republican case for liberalization, extending Robert Taylor’s economic model of republicanism to financial markets. This case adopts what I call a “philosopher-king” approach to political theory, arguing by reference an ideal or first-best set of policies or reforms. Then, I investigate the negative externalities of several decades of financial market liberalization, including the erosion of political accountability and the growing concentration of political and economic power in the hands of those best suited to profit from the rise of finance. From this “political economy” perspective, the impact of liberalization is clear: we paid for greater access to credit with political and economic domination. In republican terms, we traded freedom for credit. My analysis, moreover, has implications for republican debates on freedom and the market. In second-best worlds, where reforms will almost certainly be incremental, shaping the balance of power in ways that impact future policy, judging reforms by reference to a vision of domination-free markets will often suggest policies that make individuals less free. The political economy approach is far more relevant to debates about which economic institutions further or hinder freedom as non-domination.

Structural Reforms and Labor Reallocation: A Cross-Country Analysis

Institutional and market frictions impose costs on the reallocation of labor from low to high productivity sectors, leading to suboptimal allocations and a loss in aggregate labor productivity. Using cross-country sector-level data, we use a dynamic panel error correction model to compute the speed of sectoral labor adjustment, as well as the contribution of structural reforms in governance, labor and product markets, trade and openness, and the financial sector to lowering the costs of labor reallocation. We find that, on average, sectoral employment shares converge towards equilibrium allocations, closing about 13.7 percent of labor productivity gaps each year; this speed of labor adjustment varies across sectors and income groups. On structural reforms, we find a significant association between more efficient labor reallocation and financial market liberalization, less bureaucracy, strong judicial and regulatory environment, trade liberalization, better education and more flexible labor and product markets.

Do business cycles, investment-specific technology shocks matter for stock returns?

This paper empirically analyzes the dynamic relationship between business cycle, investment-specific technology shocks, and stock returns in the Indian context. Using Structural VAR technique the study finds: (1) business cycle shocks and stock market returns are more pronounced, especially during the financial market liberalization (2) the dominant role of global cycles over country cycles in explaining stock returns (3) interest rate plays an important role to interact the business cycle dynamics and stock returns (4) a relatively weak effect of investment-specific technology shocks on the business cycle and stock returns.

Sovereign debt management and the globalization of finance: Recasting the City of London’s ‘Big Bang’

This article focuses on the central position of sovereign debt securities in the financial system to challenge existing accounts about the 1986 ‘Big Bang’ deregulation of the City of London’s securities market. The reforms are often cast as an iconic moment of neoliberal deregulation and a key episode in the globalization of financial markets. Such accounts stress that the state played an active role in constructing the reforms and upholding the global market relations they produced, yet they remain unclear about the state’s direct interest in pursuing financial market liberalization. The article contends that domestic concerns over sovereign debt management were central to the state’s pursuit of regulatory change. The Big Bang reforms greatly expanded the size and liquidity of the market for British sovereign debt. This empowered the state, improving its capacity to conduct monetary policy and to raise finance on better terms. In doing so, the article demonstrates the necessity of examining sovereign debt management in order to specify the state’s role in the construction of financial globalization.

Innovation in financial markets and its impact on savings

Purpose- Financial innovation augment the investment alternatives of individuals, allowing them to have different investment opportunities in changing economic conditions. Channeling the idle savings into productive sectors increase the fund margin of households and entrepreneurs facing financial squezee. The aim of this paper to examine the impact of financial services on savings and domestic savings. The paper analyzes the main determinants of savings in twenty upper middle income, high income countries for the period of 2005-2014. Methodology- In this paper, we build panel data analyses to investigate the impact of innovation in financial markets on savings and domestic savings. Findings- Level of financial innovation and financial access are important parameters affecting both gross savings and gross domestic savings. higher financial innovation leads to higher savings and domestic savings. The net interest margin and banking crisis has a negative effect on savings in both models. Increase in capital formation contribute to higher gross savings and gross domestic savings. Conclusion- The paper finds that financial innovation and diversification is an important lever in the increasing of savings, therefore confirming the “liberalization of financial market” hypothesis.

The stock preferences of domestic versus foreign investors: Evidence from Qualified Foreign Institutional Investors (QFIIs) in China

Using a unique dataset, this paper investigates the preferences of, and the stock characteristics in, the domestic and foreign institutional holdings in China, for the period from 2003 to 2014. Results indicate that they have similar preferences on certain stock characteristics, but different towards industry allocations. Results also highlight their differences in corporate governance and stock picking patterns. The panel regression suggests that firms with institutional holdings in the previous period perform better in the following period. This phenomenon is stronger for the domestic holdings, indicating that domestic institutional investors have an edge in stock picking skills over foreign institutional investors. We also conclude that the ownership concentration plays a positive role on firm performances. Our results shed extra light on issues related to the Qualified Foreign Institutional Investors scheme, which contributes largely to the Chinese financial market reform after 2003. The findings have important implications to academics, practitioners, and particularly to policy makers, which enables China to further enhance its financial market liberalization with the rest of the world.

EL BOOM DE LOS CRÉDITOS DE CONSUMO EN EL PERÚ

La liberalización del mercado financiero peruano a partir de 1991 facilitó en los años siguientes, 1993- 1997, la operación de nuevos bancos y empresas financieras para atender principalmente la demanda de créditos de consumo y de las microempresas, los cuales se expandieron masivamente en poco tiempo a los sectores de bajos ingresos. Sin embargo, el tamaño del mercado y los costos elevados para otorgar microcréditos, incluso con altas tasas de interés, moderó las expectativas de mayor competencia. A partir de 1998 diez empresas de las recién llegadas salieron del mercado local por quiebra, retiro a su país de origen o fusión, el número de bancos quedó como antes, pero con una demanda creciente de crédito de consumo. Por el lado de la demanda los bienes dados en garantía de los prestatarios morosos fueron embargados y rematados lo que revela, en parte, que el problema de los sectores de bajos ingresos no es de liquidez sino económico. Para analizar las tendencias de los créditos de consumo, se comenta las fuentes bibliográficas citadas. Con esa base se determinó el objetivo de este artículo e identificó el ranking de los créditos de consumo de las empresas que ofrecen créditos de consumo. Los bancos concentran más del 75% del mercado créditos de consumo, con tendencia creciente; las demás empresas del sistema financiero en cifras absolutas siguen creciendo, pero en cifras relativas pierden su participación.

Does Shareholder Value Orientation or Financial Market Liberalization Slow Down Korean Real Investment?

This study empirically tests whether the growing importance of shareholder value orientation and financial market liberalization can explain the decline in Korean real investment since the Asian financial crisis. First, the results indicate no negative relationship between increased payments to financial markets and the slowdown in Korean real investment. Second, the estimation results do not support the assertion that financial investment earnings crowd out Korean real investment. Third, an increase in the level of uncertainty from financial market liberalization reduces real investment by Korean firms. These results suggest that financial market liberalization explains the slowdown in Korean firm real investment for the 1990-2010 period better than shareholder value orientation does.

International Real Estate Review

We show that traditional western style corporate governance tools are ineffective in Chinese real estate firms by using data from 2000 to 2012. Instead, we find evidence of effective state governance, such as corruption cleanups and financial market liberalization. Specifically, firms with fewer state connections experience better performance in provinces with greater corruption prosecutions and after 2006 with accelerated stock market liberalization. Overall, our results suggest that the Chinese real estate industry is becoming more market-oriented with assistance from the state.

The Varying Coefficient Bayesian Panel VAR Model

Interacted panel VAR (IPVAR) models allow coefficients to vary as a deterministic function of observable country characteristics. The varying coefficient Bayesian panel VAR generalises this to the stochastic case. As an application of this framework, I examine if the impact of commodity price shocks on consumption and the CPI varies with the degree of exchange rate, financial, product and labour market liberalisation on data from 1976 Q1–2006 Q4 for 18 OECD countries. The confidence bands are smaller in the deterministic case and as a result most of the characteristics affect the transmission mechanism in a statistically significant way. But only financial liberalisation is an important determinant of commodity price shocks in the stochastic case. This suggests that results from IPVAR models should be interpreted with caution.

Relationship between Financial Liberalization and Economic Growth in Emerging Economies: The Case of Vietnam

This paper examines the process of financial liberalization in Vietnam over the period from 1993 to 2013. On adopting Vector Error Correction Model (VECM), the results suggest that there is a long-term relation between economic growth and financial liberalization, in which the financial market liberalization and financial services liberalization provide better support during the growth of Vietnam’s economy. In addition, using various techniques including Granger causality test, impulse response analysis, and variance decomposition, the paper also clarifies the motives for financial liberalization from the process of short-term financial development and economic growth in the country.

Interest Rate Spread in Ghana’s Banking Sector: 2000 – 2014

(ProQuest: ... denotes formulae omitted.)1.IntroductionBank interest rate spread reflects the difference between ex-ante lending and deposit rates. It generally measures bank intermediation efficiency. Higher interest rate spreads indicate high intermediation cost and existence of asymmetric information problem which leads to agency cost for banks and reduced efficiency. Low interest rate spread is desirable for most economies because it promotes economic growth by providing higher expected returns for savers, increasing loanable funds and lowers borrowing cost for investors (Ndung'u & Ngugi, 2000).However, the banking sector in many developing countries is characterized by persistently high interest rate spreads thereby depicting the poor financial intermediation in these countries. Evidence shows that interest rate spreads in subSaharan Africa, Latin America and the Caribbean are wider than in Organization for Economic Cooperation and Development (OECD) countries (Randall, 1998; Brock & Rojas-Suarez, 2000).In Ghana, interest rate spread has become a debatable issue in recent times as the financial market liberalization has failed to significantly reduce the spread. Since the beginning of the second phase of the Financial Sector Adjustment Programme (FINSAP II) in 1994, the banking sector activities have improved and witnessed growth. This brought in its wake the emergence of new banks, increasing the number from 17 in 2002 to 27 by 2014. There has been a reduction in bank reserve requirements and some level of competition in the industry resulting in improved service delivery to clients.The observed downward rigidity in interest rate spread in Ghana may be explained by regulated entry and exit of firms in the banking industry, moral hazard problems, high operational costs, macroeconomic instability and high cost of capital. Many studies have shown these factors as major causes of high interest rate spreads in African countries in general (Chirwa & Mlachila 2004; Beck & Heiku, 2009).Furthermore, the banking sector of Ghana is characterized by high transaction costs associated with loan recovery due to the absence of reliable street address system to locate clients, high cost of verifying business and biographical information of loan applicants, absence of reliable credit records system to track and assess loan balances that applicants may be servicing with other banks at the time they put in applications for new loans. As a result of these, loan default rates have remained relatively high in Ghana, unlike in developed countries.The motivation of this study is therefore to try and identify what really influences the interest rate spread in Ghana and provide solution to reducing the wide spread in the interest rates.Ghana's interest rate spread is relatively high compared with some of the other sub-Sahara African countries. It averaged 15% between 2005 and 2010 which is more than that of Gabon (13%), Kenya (10.1%), Nigeria (5.5%), Uganda (12.9%) and Tanzania (9.7%). Therefore, the concern of the business community and policymakers has to do with the persistently high level and non-competitive nature of interest rate spreads in Ghana. This is because; the non-competitive nature of the spread could be detrimental to sustaining high economic growth.The problem and, indeed, one of the main focus of of this study, is that despite the financial sector reforms over a decade ago, interest rates spread still remains persistently wide. So, why is this the case? To what extent do individual bank factors, banking industry factors or macroeconomic factors influence the spread? What policy options are available to reduce the spread and make the sector more efficient? Answers to these questions will help understand the nature of interest rate spread in Ghana.The main objective of this study is therefore, to examine the factors that influence the interest rate spread in Ghana from year 2000 to 2010 which essentially covers the era of post-liberalization of the financial sector. …

Introduction to Collection of Papers from Conference on China's Financial Market Liberalization

Introduction to Collection of Papers from Conference on China's Financial Market Liberalization

Recent Development of Internet Finance in China

The internet finance sector in China, buoyed by the rise of online payment services, online person-to-person (P2P) lending platforms and online sales of financial products, is a revolutionary means of financing. New in China, relevant legislations are lagging behind product innovations. Internet finance risks are more in risk control and consumer information security. Despite the need to regulate China’s internet banking, the key is to strike a subtle balance between stability and financial market liberalisation.

Do capital controls affect stock market efficiency? Lessons from Iceland

This paper presents analysis of market efficiency on stock index returns of five countries; Iceland, Denmark, Finland, Norway and Sweden over different periods of market liberalization and capital controls in Iceland. Although financial liberalization is often related to increased stock market efficiency, the results of this study suggest that the Icelandic stock market was relatively more efficient during periods of capital controls relative to periods of free capital flows. This evidence suggests that financial market liberalization does not necessarily lead to a more efficient stock market, at least in a small country. Comparing the efficiency of the Icelandic stock market to four other Nordic markets (Denmark, Finland, Norway, Sweden), our results show the Icelandic and Finnish stock markets to be the least weak-form efficient.

Taming Global Finance in an Age of Capital? Wage-Setting Institutions' Mitigating Effects on Housing Bubbles

Analyses in international political economy (IPE) identify interest rate convergence, magnified in the process of European monetary integration, and financial market liberalization as causal factors behind the rise of house prices. Despite these common credit supply shocks, developed economies experienced heterogeneous trends in housing inflation throughout the 1990s and 2000s. Turning towards demand determinants of housing prices, we focus on whether wage-setting institutions blunt financial liberalization’s impact on housing inflation via their restraining effect on incomes. Employing both a panel regression analysis and a structured comparison of housing developments in Ireland and the Netherlands, we uncover two findings. First, income growth is a more important predictor of housing bubbles across OECD economies than financial variables (although income’s impact on house prices is severely mitigated for the United States). Second, countries with coordinated labor market institutions that grant political coalitions in the export sector veto powers over non-tradable sector interests, realize more restrained income growth and, in turn, are less prone to housing bubbles.

Wealth Management Products in the Context of China’s Shadow Banking: Systemic Risks, Consumer Protection and Regulatory Instruments

Although the recent financial crisis badly hurt the Western banking sector, commercial banks in China appear to have weathered the storm rather well. Nevertheless, the shadow banking system – a culprit of the crisis – also exists in China and recently has taken a turn for the worse. Wealth management products, one form of shadow banking, not only pose systemic risks to the banking sector but also raise concerns about consumer protection in the shadow banking sector at large. This article examines the systemic risks created by the proliferation of wealth management products and sheds light on the underlying logic of the policy responses adopted by Chinese regulatory authorities. While these regulatory tools are designed to address systemic risks surrounding wealth management products, the financial regulatory framework needs to be further improved to promote both financial safety and market liberalisation, thereby protecting consumer rights in the financial sector.

The benefits and costs of financial market liberalization

The last two decades have seen many emerging economies liberalizing their financial markets, and in particular, their equity markets. Encouraged by the liberal policies of the respective government...

Household Finance and the Welfare State: A Case Study of the United States, 1980-2010

The sharp rise in household finance, both in debt and in assets, is one of the striking empirical facts about the US economy of the last two decades. But it is still not clear what caused it. Economists, both mainstream and heterodox, seek an explanation in financial market innovation and liberalization. But it is hard to find systematic evidence for this link. Our paper takes up another line of inquiry. Political economists have started to ask how the restructuring of the welfare state may have affected household finance. We use SVAR analysis to establish whether there is a link between the retrenchment of public social spending and the expansion of tax-incentivised private social spending, on the one hand, and household finance variables on the other. More specifically, we ask whether the transformation of the US welfare state over the last 30 years has affected household finances through the channel of debt, leverage, or asset formation. Our findings suggest that the asset channel is empirically the most likely candidate and we point to some welfare state reforms that can support the operation of this channel since the mid-1990s.

Corporate Governance in Chinese Real Estate Firms

We show that traditional western style corporate governance tools are ineffective in Chinese real estate firms by using data from 2000 to 2012. Instead, we find evidence of effective state governance, such as corruption cleanups and financial market liberalization. Specifically, firms with fewer state connections experience better performance in provinces with greater corruption prosecutions and after 2006 with accelerated stock market liberalization. Overall, our results suggest that the Chinese real estate industry is becoming more market-oriented with assistance from the state.