The Efficacy of Financial Liberalization in Ivory Coast

By Owusu, Erasmus L.; Odhiambo, Nicholas M. | Economics, Management and Financial Markets, June 2012 | Go to article overview

The Efficacy of Financial Liberalization in Ivory Coast


Owusu, Erasmus L., Odhiambo, Nicholas M., Economics, Management and Financial Markets


ABSTRACT. This paper examines the role of financial liberalization policies in the Ivory Coast. The study incorporates both the interest rate liberalization and capital account liberalization. The paper finds that financial liberalization policies have had positive effects in the Ivory Coast. This supports the numerous past studies, which have all reported positive results regarding the effects of financial liberalization policies. However, as in many other countries, the financial liberalization policy in the Ivory Coast has brought with it a number of interrelated problems, which need to be addressed by the government. These include, amongst others, a drastic increase in imports and reduction of credits to the productive sectors of the economy. The paper, however, concludes that financial liberalization polices have mainly had positive effects on the Ivorian economy.

JEL Classification: D53, E44, F36, G15

Keywords: economic growth, financial liberalization, ECOWAS, interest rate liberalization, financial deepening, capital account liberalization, Ivory Coast

1. Introduction

The Financial Liberalization hypothesis as postulated by McKinnon (1973) and Shaw (1973) is expected to impact positively on economic growth and development. Levine (1997) stresses that the financial system promotes more effective exchange of goods and services, as well as mobilizing individual and corporate savings. It also promotes more efficient allocation of scarce resources and promotes monitoring of corporate management through capital markets. Levine (2001), while assessing whether international financial liberalization - by improving the functioning of domestic financial markets and banks - accelerates growth, finds that liberalizing restrictions on international portfolio flows tends to enhance stock market liquidity, which in turn accelerates economic growth by boosting productivity. The author also finds that allowing greater presence for foreign banks tends to enhance the efficiency of the domestic banking system - which also spurs economic growth by accelerating productivity growth. Overall, the benefit of financial liberalisation has been that it fosters development and increases long run growth (see Fry, 1980; Lanyi and Saracoglu, 1983; World Bank, 1989; Roubin and Sala-I-Martin, 1992; Levine, 1997; Demirguc-Kunt and Detragiache, 1998). Through financial liberalisation developing countries can stimulate domestic savings and growth, and reduce excessive dependence on foreign capital flows (Demirguc-Kunt and Detragiache, 1998).

Unfortunately, the experiences of many developing countries with regard to financial liberalization have been mixed. Whether financial liberalization does indeed impact positively on financial deepening, savings and economic growth, as postulated by the proponents of interest rate liberalization, remains an issue of empirical investigation (see also Odhiambo, 2010). Some of the most recent empirical studies that have been conducted on the role of financial liberalization include those of Odhiambo (2005) for the case of South Africa; Shrestha and Chowdhury (2007) for the case of Nepal; Galindo et al. (2007) for the case of 12 developing economies; Fowowe (2008) for the case of Nigeria; Lee and Shin (2008) for the case of developing countries; and Odhiambo (2010) for the case of Tanzania. Odhiambo (2005), for example, while investigating the link between money and physical capital, as postulated by McKinnon (1973), finds a strong support for McKinnon's complementarity hypothesis in South Africa. Shrestha and Chowdhury (2007), while examining the role of financial liberalization in Nepal using the ARDL modeling approach, find that real interest rates affect both savings and investment positively in Nepal. Galindo et al. (2007), while testing whether the financial liberalization improves the allocation of investment in 12 developing economies, find that financial liberalization has positive effects on the efficiency of the resources allocation. …

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