Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter?

Rossi, Marco

doi:10.5089/9781451848779.001

Cited by 82 publications

(82 citation statements)

References 25 publications

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“…22 See Dooley [1996]. 23 A recent IMF study by Rossi [1999] suggests that restrictions on capital outflows have a positive effect on economic growth. While his study corroborates earlier studies that restrictions on capital inflows contributed to economic stability, his results suggest that they may have adverse effects on economic growth.…”

Section: The Fallacies In the Standard Argumentsmentioning

confidence: 99%

Capital Market Liberalization, Economic Growth, and Instability

2000

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The world is just emerging from the worst financial and economic crisis since the great Depression. The World Bank estimated that in 1999 output of the 5 crisis countries of East Asia, two years after the onset, was still some 17% below what it would have been had the growth trend of the ten years before the crisis continued. In 2000 matters were only slightly better.1 The fragile recoveries in Korea and Malaysia are being threatened by a global economic slowdown, originating in the U.S. Elsewhere, matters are even bleaker: Indonesia remains in depression, civil unrest affecting many of its far-flung islands. In Thailand, as the economy barely struggled to attain pre-crisis levels three years later, with between a quarter and 40% of loans still nonperforming, voters gave a resounding defeat to a government that had followed the prescriptions of the IMF perhaps better than any other. While exchange rates have stabilized in East Asia, other financial variables, like stock prices, have not fared so well, and unemployment remains far higher than before the crisis, and real wages far lower.Elsewhere, large parts of the world remain in a precarious economic position-with deep recession or depression facing several countries in Latin America, and output in many of the economies in transition still markedly below what it was a decade ago.It has become increasingly clear that financial and capital market liberalization-done hurriedly, without first putting into place an effective regulatory framework-was at the core of the problem. It is no accident that the two large countries that survived the crisis-and continued with remarkably strong growth in spite of a difficult global economic environment-were India and China, both countries with strong controls on these capital flows. 2 In retrospect, it appears that Malaysia's capital controls, so roundly condemned at the time they were imposed-with political leaders like Secretary Rubin of the United States forecasting (and wishing) the most dire 1 Although real GDP growth for the 5 countries (Indonesia, Korea, Malaysia, Thailand and the Phillippines) is estimated to be around 6.9% in 2000, the World Bank's projected long term slower annual growth of 5.5% between 2003 and 2010 (Table A1.1, World Bank 2001).2 India grew at a rate of 5.2% and China at a rate of 7.8% in 1998. This contrasted with declines in much of the rest of the developing world. In particular, the East Asian crisis countries suffered a 8.2% decline that year.

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Section: The Fallacies In the Standard Argumentsmentioning

confidence: 99%

Capital Market Liberalization, Economic Growth, and Instability

2000

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“…The evidence seems to be converging to the view that liberalization contributes to both banking and currency crises. Looking at developed countries, Eichengreen, Rose and Wyplosz (1995) find that the presence of capital controls reduces the probability of a currency crisis, a result confirmed by Rossi (1999) for a sample that includes developing countries. Working with a sample of 53 developed and developing countries, Demirgüç-Kunt and Detragiache (1998b) find a strong effect on bank crises, even if the visible impact is delayed several years.…”

Section: Financial Restrictions and Financial Crisesmentioning

confidence: 50%

“…In that case, liberalization can have radically different effects depending on the accompanying measures. Recent work, surveyed by Dooley (1995) and subsequently extended by Demirgüç-Kunt and Detragiache (1998b), Edwards (2000), Mehrez and Kaufmann (2000) and Rossi (1999), shows that the adverse effects of financial liberalization occur mainly, if not only, in countries with poor institutions, characterized by the absence of proper bank regulation and supervision, widespread corruption, and more generally poor "law and order". This important observation suggests that liberalization does not necessarily raise the odds of a crisis; it could be that the danger comes from liberalization combined with other factors: the effects of other policies which were previously obscured and mitigated by financial restrictions, suddenly come into the open.…”

Section: Causalitymentioning

confidence: 99%

“…Montiel and Reinhart (1999) introduce a three-level coding allowing for an intermediate degree of 7 restriction. Grilli and Milesi-Ferretti (1995) and Rossi (1999) look separately at several types of external constraints, each of which remains described by a (0, 1) dummy variable. Johnston (1999) considers 142 types of capital controls, aggregates them into 16 broad categories, each being coded in the usual (0, 1) fashion.…”

Section: Measurement Of Restrictionsmentioning

confidence: 99%

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How Risky is Financial Liberalization in the Developing Countries?

Wyplosz¹

2002

Comp Econ Stud

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“…However, banking sector problems have been always central in these crises (Mishkin, 2001 As a result of these considerations, a new line of research both in international financial institutions and in academia focuses on deficiencies in financial markets and deduces new policy recommendations about the prudential regulation and supervision of financial systems (Rossi, 1999). The main objective of these suggestions is to reduce financial fragility and to provide financial stability.…”

Section: A Background Of the Recommended Policiesmentioning

confidence: 99%

Assessing the Preconditions in Establishing an Independent Regulatory and Supervisory Agency in Globalized Financial Markets: The Case of Turkey

Regulation

Aysan

2006

SSRN Journal

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Recent financial crises highlight weaknesses in financial markets and the need for regulatory and supervisory bodies (RSB) to improve the stability of financial markets. Currently, international institutions like the IMF and the World Bank place the independent RSB among their principle policy recommendations to developing countries. This paper acknowledges the importance of independent RSB for the proper functioning of financial markets. However, this paper also points out the preconditions to establish independent RSB. Unless certain prerequisites are satisfied, policy recommendations to construct an independent RSB are doomed to fail. The recent Turkish experience is provided as a case study to elucidate this conclusion. This paper first presents the arguments for independent RSB and the policy recommendations in institution building for stronger financial system. Then, the background of Turkish experience for independent RSB is provided. Finally, we analyze the primary reasons for the deficient performance of Turkish RSB over the last five years in an attempt to provide actual lessons for the future institutional reforms.

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Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter?

Cited by 82 publications

References 25 publications

Capital Market Liberalization, Economic Growth, and Instability

Capital Market Liberalization, Economic Growth, and Instability

How Risky is Financial Liberalization in the Developing Countries?

Assessing the Preconditions in Establishing an Independent Regulatory and Supervisory Agency in Globalized Financial Markets: The Case of Turkey

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