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Financial Liberalization, the Finance- Growth Nexus, Financial Crises and Policy Implications

Philip Arestis

Abstract The purpose of this chapter is to investigate the growth-finance nexus with reference to the ‘financial liberalization’ thesis. This thesis can be succinctly summarized as amounting to freeing financial markets from any intervention and letting market forces determine the size and allocation of credit. The history of banking, however, since the policymakers in both developing (emerging) and developed countries adopted the financial liberalization thesis tells a rather different and sad story. Ever since the adoption of the essentials of the financial liberalization thesis, banking crises have been unusually frequent and severe. In this contribution we discuss the financial liberalization aspect of crises, emphasizing two examples that led to crises: the Southeast Asian crisis and the 2007/2008 international financial crisis that led to the ‘Great Recession’. We then discuss economic policy implications, along with relevant eco-

р. Arestis (h)

Department of Land Economy, University of Cambridge, 19, Silver Street, Cambridge CB3 9EP, UK

University of the Basque Country, Bilbao, Spain © The Author(s) 2016

P. Arestis, M. Sawyer (eds.), Financial Liberalisation, DOI 10.1007/978-3-319-41219-1_1

nomic policy proposals that could support financial stability and avoid future financial crises.

Keywords Financial liberalization • Financial crises • Policy implications JEL Classification E42 • E44 • E52 • E58

 
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