INTRODUCTION

Few lament the demise of financial repression. Its fate was sealed in most countries by a growing awareness of its costly distortions, together with the increasing ease with which below-market interest ceilings and other repressive measures could be bypassed.

Unfortunately, years of repression often left financial systems poorly prepared for a liberalized regime. Spectacular failures, especially in East Asia, have caused some to question the extent and speed of financial liberalization and the opening of the capital account. Could the process have been managed better, and what is the best policy structure to aim for now?

This volume provides a basis for examining these issues. Six case studies illustrate how contrasting initial conditions in liberalizing countries as well as the design and phasing of the liberalization and the effectiveness of supportive policies – especially in regulation and supervision – matter for the success of liberalization. One chapter is devoted to considering whether some countries need to employ more robust measures of financial restraint than is now conventional if they are to avoid further solvency crises. Two cross-country econometric studies document the impact of liberalization on the behavior of interest rates and on the incidence of banking crises.

This introductory chapter begins (Section 1) by describing the emergence of financial repression and the costs and distortions which it entailed. Then (Section 2) we describe the effects of liberalization, including its impact on credit rationing and the associated rents, on short-term volatility and on the incentives for corporate governance and intermediary solvency. Section 3 presents a brief chapter-by-chapter overview of the case studies, while Section 4 concludes.