DOES FINANCIAL LIBERALIZATION REALLY IMPROVE PRIVATE INVESTMENT IN DEVELOPING-COUNTRIES

The increase in real interest rates, which is a typical element of financial reforms, does not necessarily involve a positive effect on private investment unless the authorities are careful to ensure that: (1) Bank deposits are closer substitutes to unproductive assets (cash, gold) and foreign assets rather than to capital goods; (2) The financial sector assures an efficient allocation of domestic credits; (3) The flow of domestic credit to the private sector is not absorbed by the need of the public sector.