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Chapter 2
LITERATURE REVIEW
FINANCIAL LIBERALISATION: BASIC THEORETICAL
2.1. Introduction to the Debate
FRAMEWORKS
In this chapter, it is proposed to examine changes operating in the financial
markets in developing and emerging countries. The changes
relating to financial
liberalisation are being examined from a historical perspective but at the same time,
different views are critically discussed. Certain reservations are expressed about the
New Classical approach which is the current dominating view influencing the
policies of the major international financial institutions. Some alternative schools of
thought will also be reviewed in Chapter 3.
Every country's financial system consists of the various financial institutions
and their corresponding arrangements. In an Arrow-Debreu world, markets are
complete and frictionless with symmetric information and no transaction costs
(Arrow and Debreu, 1954). In such a perfect environment, there is no role for
financial intermediaries since surplus units15 and deficit units' 6 can easily achieve
risk allocation on their own. Funding is provided through two types of market
contracts, equity and bonds and economic decisions are independent of financial
structures, (Modigliani and Miller, 1958). However in the real world, financial
markets provide various channels for the transfer of funds from surplus units to
15 Economic units whose savings exceed their planned investment.
16 Economic units whose savings are not enough to satisfy their desired investment.
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