THE EFFECT OF FINANCIAL LIBERALIZATION ON ECONOMIC GROWTH IN TRANSITION ECONOMIES: CASE OF ROMANIA

Financial liberalization process constituted by 80's when the trend of liberalization has become effective. The process has initiated with liberalization of foreign trade. After this it has continued with liberalization of every kind of capital movements and freely determination of financial asset prices, at the market by the market forces which are called as supply and demand. It is argued that the prices determined by the market improve the efficiency. Practices which targets eliminating the government interference and letting price mechanism to be determined by the market are the key factors of financial liberalization process. Allowing market to determine the interest rates under the liberal market conditions is the most important instrument of them. It obtains rational interest rates. It has stated that rational interest rates provide investment expansion and reallocation of resources from inactive to active assets. Therefore expansion of savings provides adequate resource formation to financing the investments. Thus, level of investments will also increase as parallel to the savings. An increase at the credit interest rates shifts resources to higher-yield investments thereby it will improve aggregate investment e)efficiency. As a result of the trend it will bring in its train a stable economic growth. During the 80's most of the developing countries which are in a debt and resource bottleneck, have influenced by the financial liberalization and have applied the liberalization implications. In the beginning, financial liberalization has a positive effect on economies. But after '97 Asian Crisis it argued by lots of economists that this positive effect cannot he sustainable. Hence this unfavorable effects deriving from structural problems of developing countries' financial system; we should take corrosive effect of capital inflow and outflows into account. The objective of the paper is to show the effect of financial liberalization on economic growth and to discuss the importance of financial liberalization in sustainable economic growth.