Financial development and financial liberalization in Asia: Thresholds, institutions and the sequence of liberalization

This paper investigates whether financial openness leads to financial development after controlling for the level of legal/institutional development, and whether trade opening is a precondition for financial opening. The focus is on Asia. In a panel encompassing 87 less developed countries over the period 1980 to 2000, a higher level of financial openness is found to spur equity market development only if a threshold level of legal development has been attained, a condition which tends to prevail particularly among emerging market Asian countries. On the issue of sequencing, trade openness is found to be a prerequisite for successful inducement of financial development via capital account liberalization.