Financial Liberalization, Banking Crises and Economic Growth: The Case of South Mediterranean Countries

The central aim of this paper is to empirically assess the effects of financial liberalization on economic growth in the presence of banking crises. Our empirical investigation is based on a dynamic panel model for a sample of 10 South Mediterranean countries during the period 1980-2005. Results suggest that equity market liberalization positively affects economic growth in these countries, especially in the period of fragility and banking crises. Capital account liberalization, however, has no significant effects. As expected, banking crises exert negative effects on economic growth. When we control for the presence of macroeconomic stability and appropriate openness sequencing, the anticipated effects of capital account liberalization become significant. We conclude that macroeconomic reforms and trade opening are both crucial prerequisites for the success of the capital account liberalization process.