Chapter Six: Financial Market Integration and the Fate of Small and Micro Business Lending in Emerging Economies

Overview

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Financial markets play an important role in the economic development of countries. Strong correlations exist between the depth and efficiency of financial markets and rates of economic growth (Levine, 1996). In recent times, financial markets have become increasingly interlinked and integrated. Increased financial integration is but one feature of globalization. In last three decades, a wave of financial liberalization has swept most countries. In the late 1970s and early 1980s, the early reformers abandoned repressive financial policies interest rates ceilings, high reserve requirements, credit quotas, bans on foreign ownership of banks, multiple exchange rates, repatriation of capital, repatriation of profits, deposit accounts in foreign currency for laissez-faire policies. Many early reformers were Southern Cone Latin American countries but macroeconomic disorders combined with weak supervision and regulatory frameworks led to bankruptcies, massive government interventions, and financial crises in the early 1980s (Diaz-Alejandro, 1985). In the beginning of the 1990s, a larger number of Latin American countries attempted another liberalization effort. The main difference was that at this time, regulatory and supervisory mechanisms were strengthened to avoid the previous type of crises. One other region, Eastern and Central Europe, in its transition from centrally planned economies to market-oriented economies, had a marked and rapid financial liberalization. Other regions such as sub-Saharan Africa, Asia, and Western Europe, followed a more gradual course of reform. But the quality and depth of reforms varied widely from country to country (see Figure 1).

Figure 1: Financial Liberalization across Regions, 1973 1999...