Financial Liberalization and Allocative Efficiency of Capital

Financial liberalization may have a positive effect on growth not only through the increase in the quantity of the available funds, but also through a more efficient allocation of resources across firms and sectors. Despite this intuitive appeal, t...

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Bibliographic Details
Main Author:	Kukenova, Madina
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCOUNTING AGENCY PROBLEM ALLOCATION OF CAPITAL ALLOCATION OF CREDIT ASSET PRICE ASYMMETRIC INFORMATION BANK CREDIT BANK ENTRY BANK LENDING BANKING CRISES BANKING CRISIS BANKING SECTOR BANKING SECTOR DEVELOPMENT BANKING SECTORS BANKING SYSTEM BARRIER BARRIER TO ENTRY BEHAVIOR OF PRICES BORROWING COSTS BUSINESS CYCLE BUSINESS ENVIRONMENT BUSINESS REGULATION CAPITAL ACCOUNT CAPITAL ACCOUNT LIBERALIZATION CAPITAL ACCOUNT LIBERALIZATIONS CAPITAL ACCOUNT OPENNESS CAPITAL ALLOCATION CAPITAL CONTROLS CAPITAL GOODS CAPITAL INTENSITY CAPITAL MARKET CAPITAL MARKET LIBERALIZATION CENTRAL BANKS CHECKS COMMODITY COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGES COMPETITIVENESS CONTRACT ENFORCEMENT CORPORATE GOVERNANCE COST OF CAPITAL CREDIT AVAILABILITY CREDIT MARKET CURRENCY CURRENCY CRISES CURRENCY CRISIS DATA AVAILABILITY DEPENDENT VARIABLE DEPENDENT VARIABLES DEPOSIT DEREGULATION DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMESTIC BANK DOMESTIC BANKING DOMESTIC BANKING SECTOR DOMESTIC CREDIT DOMESTIC CURRENCY DOMESTIC EQUITIES DOMESTIC EQUITY DOMESTIC SECURITIES DOMESTIC STOCK DOMESTIC STOCK MARKET DUMMY VARIABLE ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC REFORM ECONOMIC RESEARCH EMERGING MARKET EMERGING MARKET EQUITY ENTRY BARRIERS EQUITY MARKET EQUITY MARKETS EQUITY PRICES ESTIMATION STRATEGY EXPLANATORY VARIABLES EXPORT GROWTH EXPORT MARKET EXPORT MARKETS EXPORT PERFORMANCE EXPORT SHARE EXPORT VOLUME EXPORTER EXPORTERS EXPORTS EXPOSURE EXTERNAL ASSETS EXTERNAL FINANCE FACTORS OF PRODUCTION FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL DEVELOPMENT FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL LIBERALIZATION FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL STUDIES FIXED EFFECT FOREIGN ASSETS FOREIGN BANK FOREIGN INVESTORS FOREIGN PORTFOLIO GDP GDP PER CAPITA GLOBALIZATION GOVERNMENT REGULATION IMPORT INCOME INCREASING RETURNS INCREASING RETURNS TO SCALE INDICATOR VARIABLE INSTITUTIONAL DEVELOPMENT INTELLECTUAL PROPERTY INTEREST RATE INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL COMPETITION INTERNATIONAL ECONOMICS INTERNATIONAL TRADE INVESTMENT ALLOCATION INVISIBLE HAND LABOR MARKET LIBERALIZATION LIBERALIZATIONS LOANABLE FUNDS MACROECONOMIC VOLATILITY MARKET CONCENTRATION MARKET DEVELOPMENT MARKET EQUITY MARKET INTEGRATION MARKET LIQUIDITY MARKET RESTRICTION MARKET SHARE MARKET SIZE MARKET TURNOVER MONETARY FUND NET CAPITAL OPEN ECONOMY OUTPUT PORTFOLIO PORTFOLIO THEORY POVERTY REDUCTION PRICE CONTROL PRIVATE CREDIT PRIVATE SECTOR CREDIT PRODUCT MARKET PRODUCT MARKETS PRODUCTION COSTS PROPERTY RIGHT PROPERTY RIGHTS RATE OF INVESTMENT RECESSIONS REFORM PROGRAMS REGULATORY OVERSIGHT RETURN RETURNS ROBUSTNESS CHECK ROBUSTNESS CHECKS RULE OF LAW SECURITIES SEMI-ELASTICITIES STOCK MARKET STOCK MARKET CAPITALIZATION STOCK MARKET DEVELOPMENT STOCK MARKETS STOCK PRICES SUPPLIERS SYSTEMIC CRISES TOTAL EXPORT TOTAL FACTOR PRODUCTIVITY TRADE LIBERALIZATION TRADE OPENNESS TRADE POLICY TRADE REFORMS TRADING TRANSACTION TRANSMISSION MECHANISM TRANSPARENCY TRUST FUND TURNOVER VALUE ADDED VOLATILITY WEALTH WEIGHTS WORLD DEVELOPMENT INDICATOR
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110530053946 http://hdl.handle.net/10986/3433

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Summary:	Financial liberalization may have a positive effect on growth not only through the increase in the quantity of the available funds, but also through a more efficient allocation of resources across firms and sectors. Despite this intuitive appeal, there is little empirical evidence on the positive effect of financial liberalization on capital allocation. The main difficulty of investigating the linkage between liberalization of financial markets and capital allocation efficiency lies in the fact that the efficiency of capital allocation is not directly observable. One way to address this issue is to evaluate the effect of financial liberalization within the Heckscher-Ohlin framework. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of the funds, which undermines competitiveness of the economy and inhibits its long run growth. This paper tests the allocative efficiency hypothesis by evaluating the effect of stock market liberalization on the survival of different product categories using export data for 91 countries over the period of 1975-2003. Preliminary results suggest that after liberalization of the domestic stock market, products employing intensively scarce factors exit at a relatively higher rate from a country's export portfolio. In other words, following liberalization episodes, a country tends to rebalance its export portfolio towards products consistent with its factor's endowments.

Financial Liberalization and Allocative Efficiency of Capital

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