Financial liberalization has been growing as a hot debate in many economies. While many, argue that the liberalization of the economy is a stepping-stone for achieving economic prosperity, others have concerns regarding threats to protectionism and the growth prospects of domestic industries. The Chinese economy, in particular, has to look at financial liberalization from various dimensions, because of two reasons. The first is that it has a socialist economy, while there are growing advocates of open markets and second, because of the growth potential that the country has shown, by emerging as a possible economic superpower.
There is the apt availability of literature on the relationship between finance and growth of economies; however, what is missing is the disaggregated nature of this analysis. Thus, in this context, there needs to be a detailed analysis of the differential characters that the financial aspects play in the various sectors of an economy. There are found to be varying impacts on the ways in which financial integration affects the growth and production of manufacturing and services. And for economies that function as an integration of these two, it is important to understand the cause and effect relationship. For service sectors specifically, financial liberalization has found to be promoting the optimal use of financial funds and also exhibits dynamics when it comes to reallocation. For manufacturing the financial liberalization, is important in terms of identifying markets and positioning products, in domestic as well as international levels (Ghosh, J. ed., 2015). The mixture of these effects on the various sectors can be analyzed to arrive at the conclusion of overall effects of financial liberalization on developing economies like China.
It is important to understand that most parts of the world are acquainted with markets whose growth is incomplete, i.e. still in the development phase. In such scenario, there are debates that there should be some extent of control exercised by the Government forces, rather than full -fledged financial liberalization (R.O, A., Olusegun.A, A., Oluwaseyi, B. and Olus, S. ed., 2015). This argument compels us to consider the aspects beyond the liberalization sequences and for the adoption of new strategies for sustainable benefits of liberalization in such markets. The purpose of this research is thus to discover how financial liberalization affects the growth in these incomplete markets of still developing economies. The implication would be the formulation of such controls that can be established so as to bring about desired level of developments.
The literature review of the topic presented is vast as there have been many pieces of research on what the effects of financial liberalization on the economic growth would be. Here, three literature reviews have been taken and analyzed to derive a direction for the research process.
The study by Mckinnon and Shaw can be taken as the reference research for the study of financial liberalization effects on developing economies. The argument presented is that repression in financial systems results in the reduction of growth rate and actual volume of the financials in proportion to the magnitude of non-financial systems. The argument presented in the case is that the concept of financial repression is found to reduce or halt the process of development. The hypotheses presented by Mckinnon-Shaw have the following mutual elements:
- There is a saving function, which is positively responding to the interest rates (real rate) of deposits, as well as output growth.
- There is an investment function, which is negatively responding to the interest rates (effective rate) of the rate of growth.
- There is a fixed interest rate (nominal) that has the function of holding the equilibrium level higher than that of the real rate.
- Rationing applicable to loanable funds (non-price), this is reflected as incompetent.
The hypothesis taken into consideration is that the allocation of credits is dependent on banks, but it is not dependent on the estimated productivity which is projects that have investment options, rather it is dependent on the costs of transactions and risks that are perceived for evasion. Thus, allocation process is also determined by various factors such as collateral quality, the name, and benefits of convertible loans.
Literature 1: Effect of financial liberalization on Economic Growth in Developing Countries
The primary finding of this study was that there was a significant role of financial liberalization on the economy growth of developing nations, specifically Nigeria. It maintains the justification of Mckinnon and Shaw, who stated that there is a positive inference of financial liberalization on the economic growth. The conclusion of the study also reflects that investors are still willing to seek financial support from banks though there was prevalent financial liberalization. The fixing of exchange rates by the international market forces, which is one of the key features of financial liberalization, was found to be beneficial in the boosting of growth of developing economies. Additionally, the instability factor associated with financial liberalization was also found to not have an unfavorable influence on the economy’s output. Thus, at least in the case of developing economies, this financial instability attribute does not hold true (EFFECT OF FINANCIAL LIBERALIZATION ON ECONOMIC GROWTH IN DEVELOPING COUNTRIES: The Nigerian Experience, 2015). The contrast of this situation is, however, the fact that the significance of financial development in economy growth does not mean that liberalization of the financial system does not have any necessarily favorable impacts on the economy. The trade dependency ratio has also been presented as an important aspect. The degree of openness or trade dependency ratio has also been presented as an important aspect. There can still be many recommendations, which can be used to improvise the positive effects that are brought about by financial liberalization. Some of the recommendations include economic stability consideration, strengthened macroeconomic policies, improvisations of framework for regulations, interest rate policies, considerations in lending rate, checking the depreciation in currency, encouraging local as well as foreign investments, financial sector integration and increase in the fund investment possibilities.
Literature review 2: Impact of Financial Liberalization on Economic Growth:
This study was undertaken taking the developing economy of Pakistan as a reference. The empirical results of this study discovered that there are adverse effects of financial liberalization, the reason being high vulnerability towards shocks. There have been identified flaws in the practice of the extensive use of financial liberalization by the State Bank of Pakistan, Government of Pakistan and the International Monetary Fund. However, the use of financial liberalization has been recommended as the financial liberalization that promotes well-being and evolution of a nation (Hye, Q. and Wizarat, S. ed., 2015).
The financial crisis that the world has recently been exposed to is an indication that there is growing the importance of the role played by financial institutions including banks. The growing intensity of market volatility has been warned as a signal by many authors and researchers. For a nation to effectively utilize the opportunities of financial liberalization, it is important to establish the capacity of monitoring the risk and regulating financial institutions. The concern is to trace correctly those financial liberalization aspects, which are detrimental to the economy, by causing shocks and strategies are to be developed for reversing these adversities. An improved pragmatic tactic to the situation would be favorable.
Literature Review 3: Rethinking the Effects of Financial Liberalization:
This paper studies the conventional views of financial liberalization and also the modern views related to the topic. The conventional approach reflects that financial liberalization results in the economic sensitivity towards savings shocks are decreasing and the economic sensitivity towards productivity shocks increasing. The non-discriminatory approach may cause to be the difference in the effects that financial liberalization may cause (A. Broner, F. and Venturay, J. ed., 2015). The enforcement of discrimination policy may be done by modifying the non-discrimination model. The analysis of these shocks may be done in conditional approaches; a favorable shock would mean that there are no qualitative effects in the long run, and there is a converging of intervals in the steady state.
The literature review also has the purview of the concept of financial liberalization:
The transfer of direct policies and Government owned regulatory controls towards financial behaviors which are driven by the market, for the setting of prices and allocation of resources; this is the definition of financial liberalization. The study that is undertaken in the paper may use the meaning of financial liberalization as the systematic elimination of the Government set structures, guidelines of operation and controls of regulation, which are considered as hindrances to the achievement of optimal allocation of financial resources (Chapman, M. and Davis, F. ed., 2015).
The main feature of financial intervention is the Government non-intervention feature. This theory was mainly given by Smith and Rose. The logic behind the advantages of financial liberalization is that by the use of this facility, the drivers of the free financial sectors, entrepreneurs, will have the opportunity to better their services, strengthen growth and better the revenues. The multiplier effects in the economy for all other economic sectors can then be achieved. In this road of financial liberalization, it is also necessary to note that external financing dependent industry becomes able to maintain an improved growth.
Research Question and Objectives:
The research has been undertaken to understand the much-debated effect of the financial liberalization of the economy growth in developing countries, taking the Chinese economy as the reference. The study is more important in the context of China because of the limited scope for financial liberalization at the moment. The economy is functioning well with many control regulations and procedures, what heights or falls would the economy be experiencing if it was allowed to function at the liberal level; with minimum interference from the state and Government. The research question that has been stated is title related; what is the effect (favorable/ unfavorable) of financial liberalization in developing economies, especially China?
Inside the question that has been mentioned, there are many aspects that need to be covered. The objectives of this study can be summarized as:
Methodology and Research Methods:
The main purpose for the design of this study is to understand the correlation between the dependent and independent variable. The independent variables have been identified as financial liberalization as applicable in developing economies. The dependent variable, in this case, is the economic growth of developing economies. The experimental design is hypothesis testing. A cross-sectional study is best suited for this research as the collection of data is done on an individual basis from the sample respondent nations, one at a time. The length of the study will be one month i.e. 30 days.
The study will be conducted for developing economies. The economies for the analysis have been chosen keeping accessibility and convenience of the researcher in mind. The research will be conducted taking a sample of some of the developing economies, the study being focused in China.
Population and Sample:
This research is intended towards the effects of financial liberalization on the economic growth of developing economies. The study also wants to see how the sector wise effect of this phenomenon can be and how this can affect the economy as a whole. The economies that may be considered are those which have adopted or which are willing to adopt financial liberalization in the recent years, and there is a debate on this topic in those economies. Ten economies that are at a developing stage, meaning that they have incomplete markets, will be taken for the study.
Sample Design and Size:
Probability sampling will be used for the sampling design, and the method of sampling will be random sampling. Each and every developing nation of the sample size has an equal opportunity of getting selected.
Secondary data is the main source of data for the purpose of this study. The country information and official sites of financial apexes of economies, including the International Monetary Fund sources will be used.
A pilot test could also be conducted to adjust any required data requirements in the analysis. Subsequently, a reliability analysis was used to test the internal consistency of the items. The internal consistency of the variables will be checked by using the analysis from Cronbach's alpha coefficients in SPSS.
Data Collection method:
Secondary sources of data are collected for the purpose of the research. Quantitative data are to be collected using websites and resources from other authentic sites. A mailed questionnaire may be the sent to concerned authorities for the reference of such sources, which can give information on the sources of data. The nature and quality of the collected information will be administered from time to time through follow-up.
The data collected through the questionnaires will be processed using SPSS software. The measures of central tendency will be calculated along with the measures of dispersion. In order the compare the means of various economies, the independent t-test will be used. The chi-square test is to be used to confirm that a relationship exists between the dependent and independent variable. Regression analysis is to be performed in order to test the significance of the relationship between the variables. The result derivation part will be based on the analysis of these findings.
The ethical considerations in this regard can be analyzed by the use of value-based step considerations. The stepwise consideration of ethics in this study may be summarized as:
The identification of value question: The value that is derived from this study will help in the identification of the effects of financial liberalization on the economic growth of developing economies.
The action ideas related to this research will mostly involve the use of secondary data and will not thus hamper any of the aspects that deteriorate the financial performance.
The consideration of self and others in this study would be to understand the area of study, the financial situation in which all these activities occur and the consideration of others would be to understand the global context in which financial liberalization is observed and used (Chapman, M. and Davis, F. 2015).
The judgment of the data to be used should be based on the authority of the sources and the decision on the use should be taken on the same basis.
The use of data in the study is to be well reflected and presented along with the mention of correct sources.
The quality of the results and the data used are to be well analyzed before making any final assessments.
Planning and Special Resources:
It has been earlier mentioned that the research period will cover a period of 30 days. A Gantt chart may be used to understand the process in which the planning is to be done regarding the considerations that should be taken for the implementation of the planned actions.
Phase 1: The decision on the sample size, samples determination, the extent and scope of financial liberalization.
Phase 2: Assessing all the necessary resources for the analysis of the financial information obtained.
Phase 3: Within the second quarter: Receiving Data, Assessing the tools that are needed for the proper analysis of the data collected.
Phase 4: Entry of data into the used software, Understanding the variables to be determined
Phase 5: Analysis of the results as obtained in the statistical analysis using a statistical tool
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