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Critically Examine Why Financial Liberalisation Brought Financial Crisis In Most Of The Asian Countries But Did Not Bring A Crisis In Either China Or India.

The government have been using the policy of financial repression now for many years. Financial repression consisted of fixing interest rates below market levels and controlling the allocation of credit. Under developed financial systems, inefficient lending patterns, and failure of distributional goals, all existed. Low savings where noticeable due to negative real interest rates. Macro economic performance fell within this policy, also those countries whom had large negative real interest rates suffered from growth rates. Most economical factors where state owned under financial repression. Within state owned banks existed problems of poor lending decisions and low repayment rates, this in return led to bank insolvency.
The logic of financial repression was to make the financial sector assist the needs of development.

This is where financial liberalisation comes in; the purpose of this is to reverse all the negative facts of repression.

There are 3 crucial aspects of financial liberalisation, these are consisted of:
1. To allow the free flow of international finance to a country
2. To remove controls and restrictions on the functioning of domestic banks, to allow them to be integrated in the world financial markets.
3. To provide autonomy from the government to the central bank so that it's supervisory and regulatory role vis-à-vis the banking sector is dissociated from the political process of the country, and hence from any accountability to the people.

Financial liberalisation also lifts the ceiling on interest rates. By doing this it relaxes foreign currency flow.

McKinnon and Shaw (1973) stated that financial liberalisation in those countries that are financially repressed would bring about higher savings, credit supply will be increased; stimulate investment and therefore increasing growth.
From this the theory of financial liberalisation was formed, whereby the links between higher interest rates and savings where focused on as...