FINANCIAL DEVELOPMENT AND FINANCIAL LIBERALIZATION

Topic: Financial Development And Financial Liberalization In Malaysia

Topic: Financial Development And Financial Liberalization In Malaysia

There were many discussions regarding the benefits and detrimental consequences of financial liberalizations, however the issue is still subject to continuous debates and no ultimate solution have been reached at. The main issue of the debate is that there are significant positive effects of international capital surges into developing economies in Malaysia, but negative consequences can quickly overshadow these benefits if short-term inflows are allowed to reach unsustainable levels. The potential costs, and possible solutions to such problems, must be weighed against the benefits in order to determine whether short-term capital should be allowed to flow, without restriction, over international boundaries in Malaysia.

Basically capital account transactions are classified into portfolio investment and direct investment. Portfolio investment encompasses trade in securities like stocks, bonds, bank loans, derivatives, and various forms of credit (commercial, financial, guarantees). Direct investment involves the purchase of real estate, production facilities, or substantial equity investment. To answer the question whether financial liberalization is good or bad we need to analyze arguments given by both opponents and proponents of financial liberalization. First we will consider arguments against financial liberalization followed by arguments supporting the view of financial liberalization.

The Wyplosz research paper says that the evidence based on studies of the experience with liberalization in a sample of 27 developing and developed economies seems to be converging to the view that liberalization contributes to both banking and currency crisis.

Figure 1: growth in LA5 Real GDP: Obseved and counterfactual estimates1/

(stronger policy frameworks and lower vulnerabilities helped cushion the impact of the crisis on growth)

[Source: IMF staff calculations. 1/ simple average of four quarter percent changes in growth rates among the LA5 countries (Brazil, chile, Colombia, mexico and peru]

According to Wyplosz study, liberalization of financial markets may be desirable in the long term, but it is risky in the short to medium term, and Malaysia should approach this as a delicate step calling for cautious policy reactions, according to a research study for the Group of 24 on International Monetary Affairs, Malaysia grouping at the IMF and the World Bank.

In theory the liberalization of capital accounts and financial markets, promoted and pushed by the International Monetary Fund and the international financial institutions (IFIs) is different from the push at the World Trade Organization for liberalization of trade in financial services.

However, whether it ...