Content area
Full Text
Asian countries have generally been more successful than African countries in liberalizing their financial systems. Why have their outcomes differed? Asia's experience with liberalization offers some useful lessons for Africa.
BOTH ECONOMIC theory and practical experience suggest that financial liberalization can stimulate economic development. Until the 1980s, extensive government intervention was the norm in the financial markets of developing countries. Ceilings were imposed on bank interest rates; credit was allocated by administrative decision rather than market criteria; and inflows of foreign capital were strictly controlled. Over the last twenty years, however, many developing countries-persuaded by both the theoretical arguments made in support of liberalization and the experience of many of the rapidly growing countries-have begun to liberalize their financial markets by abolishing these types of controls.
The results of financial liberalization appear quite different for Asia and Africa. If one uses the ratio of broad money (cash plus deposits in the commercial banking system) to national income as a measure of financial deepening and the success of reform, liberalization appears to have been much more successful in Asia (see chart). However, this simple comparison can be misleading. Financial reform was implemented much earlier in most Asian countries than in Africa; for example, Malaysia liberalized interest rates in 1978. In contrast, even the earliest African liberalizers (The Gambia and Ghana) began to introduce reform only in the late 1980s. Moreover, financial development is only one part of a broader process of economic development, of which it is both a cause and a consequence. The generally more successful economic performance of Asian economies over the last two decades has underpinned and enlarged the benefits of financial sector reforms.
Nevertheless, the Asian experience offers some important lessons for Africa. Comparison of the experiences of the two continents suggests that if financial reforms are to succeed, they must be implemented in an appropriate macroeconomic, financial, and institutional environment
Benefits of liberalization
In most developing countries, the banking sector dominates the financial system and securities markets are not well developed. Restrictions on bank behavior imposed by the government often result in negative real interest rates and an excess demand for credit, requiring banks to ration their lending. Consequently, credit is allocated to favored sectors and firms by administrative decision,...