The Effect of Financial Liberalization on the Economic Development Process in case of Inefficient Banking

Nabi, Mahmoud Sami and Rajhi, Taoufik (2002): The Effect of Financial Liberalization on the Economic Development Process in case of Inefficient Banking.

Abstract

In this essay we develop a stylized model to investigate the role of external financial liberalization in the development process of a small economy. Firstly, we show that there exists an economic development threshold under which the capital account liberalization can not occur. Secondly, we show that in the presence of banking inefficiency, the financial liberalization presents a major risk for the economic development process. Indeed, if the economy is situated in a vulnerability region every bad performance of the investment sector could degenerate in a banking crisis delaying the development process by several periods relatively to the situation of closed economy. Finally, it is also shown that reducing the credit market imperfection decreases the likelihood of a banking crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking efficiency, capital account liberalization, confidence crisis, economic development
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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