Issues of International in Developing Countries Finance without Frontiers - Part 2
By far the most important part of capital flowing to LDCs is equity going into investment of mines, factories and – of course – also increasingly into finance. Policy makers in developing countries have been critical of foreign investment in the financial sector, maintaining that they would take advantage of serving only the best corporate customers, leaving the weaker segments to the national institutions. Evidence from Europe and a number of emerging economies show to the contrary that the opening of the financial system and foreign investment resulted in a more competitive and efficient banking system, including a better regulatory environment in a number of countries. Nevertheless, there is still a long way to go to have an effective legal framework which will be able to protect investors and creditors well.
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New attempts were made on a more rigorous base throughout Latin America and East Asia in the 1990s. In the context of structural adjustment programs, the emerging market economies and their financial institutions went through years of rigorous training, restructuring and institution building. For banks which previously operated in highly protected economies, in which credit to the local industries could be given without great scrutiny, that change was dramatic and required new analysis of risk and asset allocation.
In addition, competition in the financial sector increased not only through the entry of new domestic bank and non bank institutions, but also through foreign investment. While some of the large international banks had already been in the more developed countries for decades, when liberalization occurred, not only did those banks widened their activities, but a substantial number of new foreign financial institutions entered the liberalized money and capital ma...
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