Abstract

By equalizing rates of return across sectors, financial liberalization improves efficiency and equalizes the distribution of income. Efficiency gained in the allocation of resources increases capital usage more in previously heavily repressed sectors such as agriculture and textile, allowing up to a 19 percent expansion in production and employment. The savings and investment responses, degree of factor substitutions, are higher in the complete liberalization than in partial or piecemeal liberalization. Income, consumption, utility and overall welfare of rural and urban households increase. Liberalization is not effective if savings are used in accumulations of unproductive assets i.e. gold, jewellery, urban land, and foreign exchange. Financial liberalization improves the distribution of income by raising the wage rate of rural labor than for urban labor as rural labour-intensive sectors invest more with increased access to financial institutions and demand more labor to complement additional capital employed in these sectors.

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