The future of financial liberalization in South Asia

Abstract

This paper overviews financial liberalization in three South Asian countries -Bangladesh, India and Pakistan -in order to derive lessons for future reforms. It investigates how freeing domestic financial markets, improving capital account convertibility, and restructuring regulations have impacted the process of financial liberalization in South Asia. The paper shows that the capital account was most liberalized in Pakistan, and that Bangladesh had the least market development of the three countries under consideration. The study also reveals that of the two similar-sized countries (i.e. Bangladesh and Pakistan), Pakistan had experienced several financial crises that had required "external rescue". Bangladesh, in contrast, needed external rescue only once. India did better than Pakistan and Bangladesh, most likely because it followed a strategic plan according to which full capital account liberalization followed the deepening of domestic markets and improvements to government finances. The experience of the global crisis validated the Indian strategy and demonstrated that foreign entry, while beneficial, cannot resolve all issues. We conclude that deepening domestic markets and better domestic and international regulation are necessary prerequisites for full convertibility, and that these preconditions will be best met if future liberalization is adapted to domestic needs such as financial inclusion, infrastructure finance, and market deepening.

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Survival from the Balance of Payment Crisis: Implications from the Challenges Faced by India

“…Similarly, adopted the initiatives to pick up the merchandised exports and concessional dollar swaps for lenders to spur inflows in order to support the rupee. The provisions to have better monetary control over the liquidity in the market and helped to attract foreign investors by reducing government norms and allowed FDI (Foreign Direct Investment) in multi-brand retail, special economic zones, schemes for a software technology parks, schemes for biotechnology parks, and export-orientedunit schemes (Goyal, 2012).…”

External sector liberalization, financial development and income in South Asia

“…For example, it is argued that without the openness to the external world, China and India could not have achieved their current level of economic success (Stiglitz, 2006). However, it should also be noted that economies that have liberalized with controls have benefited much than those that have been more open, based on analyses conducted on the reform policies of China and India (Goyal, 2012). Although in the 1980s and 1990s, the pace of liberalization in South Asia was asymmetric, major economic reforms can be attributed to stabilization and structural adjustments (Dev, 2000).…”

“…This is because many reform activities need to be synchronized with domestic economic conditions. For example, capital liberalization should also be carried out in alignment with domestic financial conditions in order to attain an inclusive and deepened financial system with adequate financial infrastructures in place (Goyal, 2012).…”