One often gets to read this in media and blogs- The impact of crisis on India is less as India is less financially liberalised. What about empirical research on the issue?
Romain Ranciere of IMF has done extensive research (with Aaron Tornell and Frank Westermann) on this issue. He says financial liberalisation is beneficial but leads to crisis as well. He compares a country that adopts financial liberalisation with a relatively less liberalised economy. He then sees the growth of the two over a long time period to see how the 2 economies have performed. His answer: financially liberalised econs perform better than non-financially liberalised even if former has more crisis than latter.
The research paper is here (a shorter note here as well, presentation, his article at voxeu ). His research mainly compares two economies – India and Thailand. Thailand belongs to the first category and India to second category. Findings:
Thailand and India illustrate the choices available to countries with weak institutions. While India followed a path of slow but steady growth, Thailand experienced high growth, lending booms and crisis (see Figure I). GDP per capita grew by only 114 percent between 1980 and 2002 in India, whereas Thailand GDP per capita grew by 162 percent, despite the e¤ects of a major crisis.
The link between skewness and growth is economically important. Our benchmark estimates indicate that about a third of the di¤erence in growth between India and Thailand can be attributed to systemic risk taking. Needless to say this finding does not imply that financial crises are good.
This is interesting. It says despite the cost of the crises, financially liberalised economies tend to do better than non-financially liberalised economies. However, one must take this with a pinch of salt. We would like to see the comparisons across other economies as well- say other South East Asian nations, Latin American nations etc. as well. Though, the authors point out they have studied 83 countries from 1960-2000 and the findings are similar, still it makes sense to compare the growth patterns for others as well. It would also be interesting to include ongoing crisis in the database to see whether relation still holds.
The paper also adds the importance of institutions. It says best policy is to get institutions right first and then move towards financially liberalisation. However, as all this institutions setting takes time, it might not be wrong to get financial liberalisation going on. After all, it generates more growth on an aggregate despite the costs of the crisis.
However, is paper is highly technical and I am still trying to figure it out. It points to some literature on the issue. So, it is a place to begin research on the hot issue.