UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACT OF FINANCIAL LIBERALIZATION ON PRIVATE SAVINGS RATE: A PANEL DATA ANALYSIS MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY Mr. LE THANH THANH Academic Supervisor: Dr. NGUYEN HOANG BAO Ho Chi Minh City, April 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACT OF FINANCIAL LIBERALIZATION ON PRIVATE SAVINGS RATE: A PANEL DATA ANALYSIS MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY Mr. LE THANH THANH Academic Supervisor: Dr.
NGUYEN HOANG BAO Ho Chi Minh City, April 2016 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This paper investigates the impact of financial liberalization on private savings rate. The study covers the data of 58 countries from 1980 to 2005. The Abiad et al (2008) database was used to measure the financial liberalization indices. Three-Stage Least Squares (3SLS) was chosen as the main estimator of this study.
The finding results show that financial liberalization has both direct and indirect effect on private savings rate. The direct effect, through state ownership in the banking sector, credit controls and excessively high reserve requirements, entry barriers, prudential regulations and supervision of the banking sector, capital account restrictions, interest rate controls, reduces private savings rate while indirect effect, through entry barriers and capital account restrictions, are increasing. Besides that, the findings also show an ambiguous correlation between economic growth and the private saving rate. However, using de jure indicators to measure financial liberalization makes the study can only identify the existence and direction of the impact of financial liberalization on the private savings rate.
The intensity of this impact can not yet be measured. In addition, the observed data only updated to 2005 and not focus on any special group of countries. So, it is not appropriate to recommend a particular policy based on the results of this study. Keywords: financial liberalization, private savings, panel data 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT Foremost, I would like to sincerely and gratefully thank Dr.
Nguyen Hoang Bao, my supervisor, for his great support, crucial advice, and precious during my thesis finish. Without his guidance, I am unable to finish this thesis. Besides, I special thanks to the Vietnam – Netherlands Programme, especially professors and staffs for their help during my thesis process. I would like to thank all my friends who always beside me to encourage, help me when I got stuck in doing the thesis and want to give up.
Without them, I cannot finish this thesis. Last but not least, I would like to thank my family for their sacrifices for supporting me not only in doing thesis but also in my life. 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONTENTS ACKNOWLEDGEMENT. 6 LIST OF TABLES.
8 LIST OF FIGURES. 9 CHAPTER ONE: INTRODUCTION .2 Research objectives and research questions .3 The structure of research. 13 CHAPTER TWO: LITERATURE REVIEW .2 Theoretical models of saving function. 15 Keynesian savings function.
16 Life cycle theory. 18 The Mckinnon - Shaw Hypothesis .2 Financial liberalization indices .3 Process of financial liberalization .4 Criticism of financial liberalization .2 Theoretical models of economic growth. 33 Classical growth theory. 33 Dual-sector model.
33 Keynesian growth theory. 34 Harrod–Domar model .4 The relationship between private savings, economic growth and financial liberalization. 43 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 General saving function .2 Financial liberalization and private saving rate. 45 CHAPTER THREE: RESEARCH METHODOLOGY.1 Measurement of private savings rate .2 Measurement of financial liberalization .3 Summarize of variables description and data sources.
59 CHAPTER FOUR: RESULTS. 71 CHAPTER FIVE: CONCLUSIONS .1 Major findings and policy implication. Financial liberalization measures. Coding rule of Abiad et al financial liberalization indices.
List of countries. Detailed econometrics estimating and testing results. 103 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 2. Determinants of the Ratio of Private Saving to Income in Panel Studies .1 Description and expected sign of variables .2 The direction of combined effect .3 Summary Statistics for Financial Liberalization Components and Index (Abiad et al, 2008) .4 Variable description and data source.2: Correlations among financial liberalization indices .3 The effect of seven financial liberalization indicators on private savings rate.
70 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2.1: Life cycle theory .2: The effect of interest ceiling rate on saving and investment .3: The Mckinnon and Show hypothesis .4: Financial liberalization process.1: The interaction between Financial liberalization, Private savings and Economic growth .1 The average private saving rate, economic growth and financial liberalization (1980 - 2005) .2 Private saving rate (PSR), GNDI per capita growth rate (GY) and Financial liberalization indices (1980 - 2005) .3: Scatter plot between Private saving rate (PSR) and Financial liberalization indices (1980 - 2005). 68 9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER ONE: INTRODUCTION 1.1 Problem statement From the mid-1980s, many developing countries undertook to liberalize its financial markets. This process is considered to be one of the important factors in promoting national economic development as well as promoting economic integration in the world economy. Studying about the impact of financial liberalization on the country’s economy, therefore, is a very interesting topic.
Although there have been many studies on this subject, however, there are a lot of issues have not yet been settle and must be discussed further. One of them is the impact of financial liberalization on savings. Beginning with McKinnon (1973) and Shaw (1973) theory, they suggest that financial liberalization will break the government intervention on interest rates, pulling interest rate up to the natural equilibrium of the market, thus increasing the savings rate. Many subsequent studies have tried to find a deeper understanding as well as testing this hypothesis (Giovannini, 1985; Campbell and Mankiw, 1990; Ostry and Reinhart, 1992; Koskela, Loikkanen and Viren, 1992; Bayoumi, 1993; Jappelli and Pagano, 1994; Ogaki, Ostry and Reinhart, 1996; Bandiera et al, 1999; Loayza et al, 2000; Chowdhury, 2001; Hebbel and Serven, 2002; Reinhart and Tokatlidis, 2003; Baliamoune and Chowdhury, 2003; Nair, 2006; Ahmed and Islam, 2010; Ang and Sen, 2011).
However, the results are still ambiguous. Some studies show the positive impact of financial liberalization on savings (Bandiera et al, 1999; Baliamoune and Chowdhury, 2003; Ahmed and Islam, 2010), while others indicate that financial liberalization is the cause that reduce savings rate (Koskela, Loikkanen and Viren, 1992; Jappelli and Pagano, 1994; Loayza et al, 2000; Ang và Nair, 2006; Sen, 2009; Ang, 2011). Besides, there are other studies resulting an unclear relationship between these two factors (Bayoumi, 1993; Hebbel and Serven, 2002; Reinhart and Tokatlidis, 2003). One of the limitations of previous studies is the difficulty to measure accurately financial liberalization.
This led to the following weaknesses: 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com First, many studies measure financial liberalization very rudimentary. They used a dummy variable with value 0 and 1 to measure financial liberalization (Harris, et al., 1994; Haramillo, et al., 1996; Hermes and Lensink, 1998; and Bekaert, et al.With 0 for year financial repression and 1 from the year starting financial liberalization. In fact, it is clearly that financial liberalization is a process, not simply as an event. The financial markets have gone through many stages to reach a certain degree of liberalization, it can not be changed in a short time.
Second, some studies focus only on one or several aspects of financial liberalization as opening up banking and stock Domestic Markets to Foreigners (Levine, 2001), capital account liberalization (Eichengreen and Leblang, 2003) and stock market liberalization (Bekaert, et al. Financial liberalization, in fact, is a process that includes a lot of stages and different aspects. The review merely on one or a few aspects can not bring the expected results. Another thing should also mention when referring to aspects of financial liberalization is: most previous studies have focused on building a general index reflecting the financial liberalization of the country.
The general index is constructed primarily by summing the possible aspects of financial liberalization can be measured. Principal component analysis (PCA) is a method often used. This inadvertently leads to two following consequences: - This index may consist of two parts: policies have an effect on private saving and policies have not (or insignificant) effect. The combined all of those effects could not provide a specific and detailed view of the impact of financial liberalization.
Factors have significant effect General financial liberalization index Factors have insignificant effect 11 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - The factors that affect private savings may include two smaller groups. One group has a positive impact when the other has a negative impact. The combination of all these factors that could make them eliminate or weaken each other, leading to undesirable results in the research process. Positive effect Factors have significant effect General financial liberalizaation Negative effect index Factors have insignificant effect The last issue is the surprisingly lacking cross countries analysis.
Most previous studies have only focused on one country or a small group country. On average, the study of each country or each group of countries often give a different result. The research on a broad perspective with a larger data sets will bring more general accurate judgments on this issue. This study uses a new data set in which financial liberalization is divided into multiple fragments in order to approach and examine the impact of financial liberalization on saving more specific and detailed.
Besides, as mentioned above, the limited studies within the country or a small group of neighboring countries often lead to different results. This study uses large data sets with more than 50 countries in many regions around the world which differ the level of socio-economic development in hopes of eliminating or limiting the effects of the exogenous variation distort the impact of financial liberalization on private savings, and shows the pure and raw effects of the relationship between these two factors.2 Research objectives and research questions To resolve the problem the first two issues, this study use Abiat et al (2008) data set to measure financial liberalization. This database divides financial liberalization into seven 12 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com small indices represents for seven different aspects, including interest rate controls, credit controls and reserve requirements, state ownership, entry barriers, policies on securities markets, restrictions on the capital account, and banking regulations. This study expects to find more specific results about the impact of financial liberalization on private savings rate.
To resolve the third issue, this study used a large data set for 58 countries around the world in hopes of providing a most general theoretical view about that relationship. With those main purposes, this study will answer two following questions: - Does financial liberalization effect on private saving rate? - How does each channel of financial liberalization, including interest rate controls, credit controls and reserve requirements, state ownership, entry barriers, policies on securities markets, restrictions on the capital account, and banking regulations, effect on private saving rate? 1.3 The structure of research This study is organized into five sections. Chapter one presents an overview of the main objectives of this study. Chapter two overviews of theoretical background as well as present and comment on the previous empirical studies.
The analytical framework of the study is also presented in this chapter. Measurement and analysis of the data analysis are discussed in chapter three. Chapter four covers research methodology, empirical model and the results of the regression model.