THE IMPACT OF FINANCIAL LIBERALISATION IN DEVELOPING COUNTRIES: EXPERIENCES FROM FOUR SADC COUNTRIES
Since the widespread acceptance of the ideal of financial liberalisation, many countries have made attempts to liberalise their financial sectors by deregulating interest rates, eliminating or reducing credit controls, allowing free entry into the banking sector, giving autonomy to commercial banks, permitting private ownership of banks, and liberalising international capital flows. However, of these six dimensions of financial liberalisation, interest rate liberalisation has received the main focus of attention. Unfortunately, the countries that embarked on interest rate liberalisation have had mixed experiences. Whether financial liberalisation does indeed impact positively on savings, financial deepening, and economic growth still remains a question for empirical investigation. Although a number of empirical studies have been conducted on the link between financial liberalisation and economic growth, the majority of these studies have concentrated mainly on Asia and Latin America, affording sub-Saharan African (SSA) countries either very little coverage or none at all. Even where such studies have been undertaken, findings on the role of financial liberalisation and its effect on financial deepening, savings, and economic growth are at best inconclusive. For instance, several studies have found little evidence for the positive impact of interest rate liberalisation on economic growth.
Yet, there has been enormous support for the position that even though positive interest rates may not have a direct and significant influence on domestic savings, they do affect economic growth through their effect on financial deepening (Odhiambo 2008). Previous empirical studies on this subject suffer from three major limitations. First, the majority of the previous studies on this subject have attempted to examine the direct relationship between interest rate reforms and economic growth. Yet, it is now becoming clear that the relationship between interest rate reforms and economic growth is an indirect one. Interest rate liberalisation impacts on economic growth inter alia through its influence on financial deepening and savings. Secondly, the majority of previous studies have concentrated mainly on the use of a bivariate causality test to examine the causal relationship between financial development and economic growth and may, therefore, suffer from the omission-of-variable bias. Thirdly, some of the previous studies have relied on the cross-sectional data to examine the relationship between interest rate reforms and economic growth. Yet, it is now clear that the cross-sectional method of lumping together data on countries that are at different stages of financial and economic development may not satisfactorily address the country-specific effects.
The current study, therefore, attempts to investigate the dynamic impact of financial liberalisation on financial deepening and economic growth in four SADC countries, namely South Africa, Tanzania, Zambia, and Lesotho. Specifically, the study attempts to answer two critical questions in a step-wise fashion: i) Do positive interest rates that result from financial liberalisation lead to financial deepening in the selected southern African countries? 2) Does financial deepening, which results from interest rate liberalisation, Granger-cause economic growth? The selected countries represent a modest cross-section of the general financial structure prevalent in many southern African countries.
1.2 Organisation of the Study
The study is divided into nine chapters. Chapter 1 (Introduction) provides a brief background and the objectives of the study. A review of the theoretical and empirical literature on the financial liberalisation policy, and the controversies over the efficacy of the financial liberalisation hypothesis are presented in Chapter 2. Issues discussed here include: the origin of the financial liberalisation theory and policy; the controversies over the role of financial liberalisation hypothesis; the dynamic relationship between financial liberalisation, financial deepening, and investment; and the causal relationship between financial development and economic growth. In addition, the relationship between financial development, economic growth, and savings is also presented as a precursor to the trivariate Granger causality test. Throughout this Chapter the theoretical literature is sequentially reinforced by the empirical findings in a step-wise fashion. In Chapters 3, 4, 5 and 6, the experiences of the study countries with financial libralisation are presented in a case-by-case fashion. Chapter 7 presents the methodology and the empirical model specification, while Chapter 8 presents the empirical findings of the study, as well as a discussion on the results. The conclusions, policy recommendations, and the limitations of the study are presented in Chapter 9.