n AfricaGrowth Agenda - Financial sector liberalisation and the current global financial crisis : a case for financial restraints

Volume 2009, Issue 7
  • ISSN : 1811-5187


Since the 1970s, the prevailing view in many developing countries has been that the free market provides the best environment for economic growth. In the strictest sense, financial liberalisation implies no government regulation on the financial sector and no caps on the interest rates. The motivation for this laissez-faire outlook is based on the evils of financial repression prior to financial reforms, where heavy-handed government intervention was the rule in the economy. The results of financial repression were rampant inflation, negative real interest rates and economic stagnation. However, the fact that financial repression was not successful does not necessarily mean that modest government intervention cannot be healthy. Moreover, in the wake of the current financial crisis, it is clear that financial liberalisation may not be the lesser of the two evils. In this piece we build a case for some friendly government interventions in the financial sector, commonly known as financial restraints, whose ultimate goal is to perfect the financial sector in the presence of information asymmetry currently prevalent in many developing countries.

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