The relatively recent drive for financial reform in most countries has been spurred by the belief that the existing financial structure was not adequate to promote and assist growth in the real economy. Although specific arrangements differed from country to country, many systems were characterized by interest-rate controls that had led to low, often negative real interest rates. Moreover, there was a high degree of interference by the government in the allocation of credit, with designated priority sectors enjoying privileged access to credit. It has become common to use the label of financial repression to characterize the state of the financial systems under these circumstances. Many developing countries have moved away, in different degrees, from this model, and have introduced liberalization measures designed to leave to the market a greater role in the determination of interest rates and in the allocation of financial resources.

Together with the practical dissatisfaction with the existing structure of the financial systems, the move to liberalization was also influenced by the intellectual challenge to financial repression that started with the seminal contributions by McKinnon (1973) and Shaw (1973). Although the details of the analysis differ, the basic idea is that lifting the ceiling on interest rates and eliminating other interventions into the credit allocation process will increase the amount of financial savings, as well as the quantity and quality of investment, and stimulate growth. Much has been written since on the role of the financial system in promoting growth, but there has been relatively little convincing empirical evidence on the real effect of financial liberalization, in part because in many cases reform programs did not take hold until the 1980s.