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Financial Liberalization and Allocative Efficiency of Capital / Madina Kukenova
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Kukenova, Madina
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Capital Allocation.
- Currencies and Exchange Rates.
- Debt Markets.
- Economic Theory & Research.
- Emerging Markets.
- Equity Market Liberalization.
- Financial Liberalization.
- International Economics & Trade.
- International Trade.
- Macroeconomics and Economic Growth.
- Markets and Market Access.
- Poverty Reduction.
- Local Subjects:
- Capital Allocation.
- Currencies and Exchange Rates.
- Debt Markets.
- Economic Theory & Research.
- Emerging Markets.
- Equity Market Liberalization.
- Financial Liberalization.
- International Economics & Trade.
- International Trade.
- Macroeconomics and Economic Growth.
- Markets and Market Access.
- Poverty Reduction.
- Physical Description:
- 1 online resource (46 pages)
- Place of Publication:
- Washington, D.C., The World Bank, 2011
- System Details:
- data file
- 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.
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