Financial liberalisation, stockmarkets and economic development

During the 1980s and 1990s, many developing countries (DCs) have been engaged in far-reaching reforms of their financial systems, liberalising them and making them more market-oriented. This liberalisation, involving inter alia ‘financial de-repression’ has been inspired partly by the work of the McKinnon (1973) and Shaw (1973) [M-S] school. This paper suggests that, in addition to financial de-repression, there has been a major new element in the development of DC financial systems in recent years - the establishment and fast expansion of stockmarkets. These markets have played a key role in the internal as well as external financial liberalisation processes in leading DCs. Further, the paper finds that the actual behaviour of these markets in many countries has led to outcomes which undermine the effects of the higher real interest rates arising from 'financial de-repression'.