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The Effect of Financial Openness on the Economic Growth of Ghana

Autor:   •  March 6, 2013  •  Research Paper  •  1,595 Words (7 Pages)  •  997 Views

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Many countries in the world have over the decade tried to achieve Economic Growth by liberalizing their financial system. While some have succeeded in growing their economy through this strategy (financial liberation), some are yet to gain grounds in their economy and some have even suffered the adverse effect on their economy as a result of this policy.

Financial liberation, according to Johnston and Sundaranjan (1999), is a set of operational reforms and policy measures designed to deregulate and transform the financial system and its structure with the view of achieving a liberated market – oriented system within an appropriate regular framework. It includes financial market deregulation and capital account liberalization (i e. establish convertibility) reduction or abolition of reserve requirement, the elimination of inflationary finance and other forms of taxing the financial system .It may also include revising of all policies that distort a financial intermediary's fund allocations such as government's direct credit lines with commercial banks discriminatory loan rates and the compulsory purchase of government liabilities.

Evidences show that most countries that undertake the policy of financial openness receive some benefits in one way or the other. In the standard neoclassical mode , a capital market liberalization lowers the cost of capital , thereby inducing additional investment and a temporary growth response. However , the decrease in the cost of capital appears rather modest ( Bekaert and Harvey( 2000) ,Henry ( 2000)) and the associated increase in investment is small relative to the large Gross Domestic Products (G.D.P) growth increment (Henry (2003)). Of course , financial openness may also directly affect factor productivity .For example , by spurring financial development , promoting better corporate governance, or signaling higher quality government (Rajan and Zingales (2003)). Gourinchas and Jeanne (2006) argue that examining the productivity effects of international financial integration is far more important than considering its investment effect, as the latter have little chance of helping developing countries close the development gap.

Financial liberation have six dimensions ; namely the deregulating interest rates, eliminating or reducing credit controls , allowing free entry into the banking sector , giving autonomy to commercial banks, permitting private ownership of banks and liberalizing international capital flows and interest rate liberalization. Previous studies by researchers have shown that interest rate liberalization has being the most effective strategy for financial liberalization (openness).



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