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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.

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

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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.

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

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Because of the steady liberalization of the capital account since the early 1990s and increased financial integration of the Indian economy, capital flows to India have moved in tandem with broad global trends. This paper looks at the extent to which India's monetary policy has been affected by the ebbs and flows of the capital it receives. For ease of narration, the paper divides the post-liberalization period since the early 1990s into three phases-early 1990s to early 2000s, a period of increasing but still modest capital flows; early 2000s to 2007-08, a period of capital flow surge when inflows increased rapidly; and a period of sudden stops and volatility, starting in 2008-09, when capital flows reversed in the post-Lehman Brothers collapse, and again during the tapering tantrum of 2013. The paper shows that although ordinarily domestic policy imperatives, such as price stability and growth, have taken precedence over issues related to exchange rate or capital flows in policy rate setting, some accommodation in money supply is evident during the surge and stop episodes. The broad policy mix to handle large increases or reversals of capital flows has included reserve management, liquidity management, and capital flow measures.

Access to Finance --- Capital Flows --- Central Banks --- Currencies and Exchange Rates --- Debt Markets --- Economic Theory & Research --- Emerging Markets --- Finance and Financial Sector Development --- Financial Liberalization --- Macroeconomics and Economic Growth --- Private Sector Development

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Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China's foreign direct investment liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are "short equity, long debt." Third, China and India have improved their net external positions over the past decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies, domestic financial sector policies, and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset and liability holdings) and, consequently, the international financial system.

Balance Sheets --- Bank Policy --- Borrowers --- Capital Flows --- Currencies and Exchange Rates --- Debt --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Equity --- Exchange --- Exchange Rate --- External Assets --- Finance and Financial Sector Development --- Financial Developments --- Financial Liberalization --- Financial Literacy --- Holdings --- Income Level --- International Financial Integration --- International Financial System --- Investment --- Investment and Investment Climate --- Investment Rates --- Liabilities --- Macroeconomics and Economic Growth --- Private Sector Development --- Reserves --- Share

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April 2000 - Debt-equity ratios do not tend to increase after financial liberalization, but there is a shift from long-term to short-term debt. Globalization has uneven effects for firms with and without access to international capital markets. Countries with deeper domestic financial markets are less affected by financial liberalization. Schmukler and Vesperoni investigate whether integration with global markets affects the financing choices of firms from East Asia and Latin America. Using firm-level data for the 1980s and 1990s, they study how leverage ratios, the structure of debt maturity, and sources of financing change when economies are liberalized and when firms gain access to international equity and bond markets. The evidence shows that integration with world financial markets has uneven effects. On the one hand, debt maturity for the average firm shortens when countries undertake financial liberalization. On the other hand, domestic firms that actually participate in international markets get better financing opportunities and extend their debt maturity. Moreover, firms in economies with deeper domestic financial systems are affected less by financial liberalization. Finally, they show that leverage ratios increase during times of crisis. In an appendix, they analyze the previously unstudied case of Argentina, which experienced sharp financial liberalization and was hit hard by all recent global crises. This paper - a product of Macroeconomics and Growth, Development Reseach Group - is part of a larger effort in the group to understand financial development and financial integration. The authors may be contacted at sschmukler@worldbank.org or vesperon@wam.umd.edu.

Banks and Banking Reform --- Bond --- Bond Markets --- Debt --- Debt Markets --- Debt Maturity --- Debt-Equity --- Economic Development --- Emerging Economies --- Emerging Markets --- Equity --- Finance and Financial Sector Development --- Financial Liberalization --- Financial Markets --- Financial Structure --- Financial Systems --- Globalization --- International Bond --- International Financial Markets --- International Markets --- Maturity Structure --- Private Sector Development --- Share --- World Financial Markets