WHY SHOULD FINANCIAL LIBERALISATION INDUCE FINANCIAL CRISIS? / POURQUOI LA LIBERALISATION FINANCIERE DEVRAIT-ELLE INDUIRE LA CRISE FINANCIERE?

In recent times, many developing countries have liberalised their financial systems as part of comprehensive economic reform programmes. We have witnessed the liberalisa tion of interest and exchange rates, promotion of market-based allocation of credit, softening of entry conditions into the banking industry, and the relaxation of bank portfolio restrictions. In the wake of liberalisation, however, many countries have suffered sharp increases in interest rates, bankruptcies of financial institutions, and worsening inflation. Many governments have been compelled to rescue failing banks and re-impose controls. This paper argues that these problems can be traced to the failure to revamp the bank prudential regulatory and supervisory framework before commencing deregulation plus errors in the timing, sequencing and speed of financial reforms. It is contended that these factors are powerful determinants of whether financial liberalisation succeeds or fails. A brief review of the liberalisation experience of selected developing countries serves to underscore this contention. Principally, it is observed that for financial liberalisation to be a success, it must be gradual and preceded by the strengthening of the bank supervisory and regulatory framework. The restoration of macroeconomic stability is also crucial. POURQUOI LA LIBERALISATION FINANCIERE DEVRAIT-ELLEINDUIRE LA CRISE FINANCIERE?