WORLD TRADE
ORGANIZATIONS/C/W/26/Add.1
29 May 1998
(98-2320)
Council for Trade in Services
ECONOMIC EFFECTS OF SERVICES LIBERALIZATION:
OVERVIEW OF EMPIRICAL STUDIES
Background Note by the Secretariat
Addendum
At the request of the Council for Trade in Services, the Secretariat submitted in October 1997
a Background Note on the Economic Effects of Services Liberalization (S/C/W/26) which was
discussed by the Council at its meetings on 26 November 1997 and 26 February 1998.   The Note was
intended to form part of the information exchange  programme, outlined in the Report of the Council
for Trade in Services to the General Council (S/C/3),  which seeks to "contribute to the assessment of
trade in services which would assist future negotiations in the services sector".
At the Council meetings in November 1997 and February 1998, several delegations expressed
interest in further discussing growth, developmental and other economic effects of liberalization
policies, and the Secretariat undertook to provide, as resources permit, further information on thecontent of empirical studies.  Accordingly, this Note provides an overview of the main findings of all
studies available to the Secretariat and published since January 1990, dealing with the economic
effects of liberalization.  As already noted in document  S/C/W/26, the sectoral and policy focus does
not reflect any a priori selection by the Secretariat, but is dictated entirely by the availability of
publications.
The Note is in three parts.  An introductory section (Section I) seeks to summarize salient
points - main empirical findings, policy implications, etc. - discussed in the individual studies.Section II contains brief descriptions, in a standardized format, of the content of all publications made
available to the Secretariat during this exercise.  The majority of publications was provided by the
Library of the Kiel Institute of World Economics, the central library for economic sciences in the
Federal Republic of Germany.  Section III provides an updated and extended version of the
Bibliography initially contained in document S/C/W/26, taking into account new information receivedsince.S/C/W/26/Add.1
Page 3
TABLE OF CONTENTS
Page
I. INTRODUCT ION ................................................................................................................5
II. REVIEW OF INDIVI DUAL PUBLI CATIONS ................................................................9
A. F INANCIAL SERVICES :  BANKING ...........................................................................................9
B. T ELECOMMUNICATIONS ........................................................................................................86
C. A IR TRANSPORT ....................................................................................................................91
D. R OAD TRANSPORT ..............................................................................................................113
III. BIBLIOGRAPHY.............................................................................................................11 7S/C/W/26/Add.1
Page 5
I. INTRODUCTION
1. This Note contains short reviews of the content of recent studies of the economic effects of
liberalization in services.  The studies reviewed have all been published since January 1990.   They
comprise all of the publications the Secretariat has been able to obtain on this subject.  The studies
differ in many ways - for example in their sectoral and country coverage, analytical approach and time
frame.  This limits the possibility of tracing common themes or, more ambitiously, drawing generalconclusions on the framing or sequencing of services liberalization policies.  Nevertheless, there
seems to be at least one overriding objective that has inspired virtually all reforms, regardless of the
individual measures or sectors involved:  giving market forces a freer reign in determining production,
trade and/or investment patterns.  In turn, this objective normally implied a move towards competitive
prices, aligning them more closely with prevailing international levels, and additional emphasis being
placed on positive adjustments via product and process innovation.
2. While the Secretariat's intention was to review all relevant studies, no matter what were the
services areas they covered, it turned out that the great majority of the available studies dealt with
financial sector reform.  Other focal areas of research were deregulation and/or liberalization
measures in the aviation and telecommunication industries.  Research in these areas may have been
stimulated by, and be indicative of, actual policy developments;  few other services sectors have
undergone comparably sweeping policy changes over the past decades.  Nevertheless, it is unfortunatethat the coverage of empirical studies is so limited.  However, with the Uruguay Round results being
implemented across a broad range of countries and sectors, there is an increasing number of cases
which may inspire empirical research.  Any future overview papers may thus be able to cast light on a
wider range of services.
3. Financial services, telecommunications and air transport may be viewed as the infrastructural
backbones of any modern-day economy.  They tend to have a significant impact on growth and
efficiency across a wide range of user industries and, by implication, on overall economic
performance.  However, it is precisely this impact which is very difficult to capture empirically.
While declining airfares or telecommunication tariffs may be ascribed to competition-enhancing
regulatory reform, it is next to impossible to iden tify the impact of lower priced and, possibly, more
efficient services inputs on the user industries, i.e. virtually all economic activities in a liberalizing
country.  In a similar vein, interest rate deregulation is normally expected to help improve sectoral and
inter-temporal resource allocation, with the ensuing stimulus for aggregate savings and investment
being seen as a core link between financial sector deregulation and growth.  However, how could this
link be isolated in empirical studies, given that reform-oriented countries may have moved on a
variety of fronts and that, to the chagrin of researchers, reforms are not implemented under laboratory
conditions?
4. The immediate result of reform, traced in a number of studies, may be a fall in the incumbent
firms' profitability.  Declining profits at early stages of reform could be viewed as a natural corollary
of a process ultimately leading to more efficient production and marketing systems.  In response to
interest rate liberalization, airfare deregulation and telecom demonopolization, companies in various
countries have sought to enhance allocative, operational and dynamic efficiency.  Where internalreform foundered, for example due to cost rigidities or managerial misjudgement, new entities have
emerged from take-overs, mergers or new business set-ups.  The post-deregulation rise in the number
of failures, not least in the financial sector, may be ascribed to the elimination of inefficient firms as
competition intensified.
5. Several studies on financial sector reform point to a persistent trend of declining bank profits
which led to widespread insolvencies, culminating in severe financial crises. This phenomenon was
often related to the banks being saddled with large shares of non-performing and other loans of
dubious commercial value.  Moreover, banks in certain countries appear to have responded to falling
profits, due to lower interest margins, by expand ing their loan portfolios with little regard to theS/C/W/26/Add.1
Page 6
hazards involved.  The rise in imprudent lending is possibly the most serious risk for deregulation
policies that are pursued in the absence of adequate banking supervision and prudential control.
6. There are also cases where financial reforms suffered from continued expectations of the
government providing protection through some form of "deposit insurance".  In turn, such
expectations led banks and depositors to assume risks which they might not have taken otherwise.
(Some studies also argue that branching restrictions have affected the banks' ability to diversify risks,thus increasing the perceived need for deposit insurance in certain countries).  There are cases where
the rise in risky loans contributed to a widening of interest margins after deregulation, indicating - in
defiance of a priori expectations  - increasing costs of financial intermediation.  In addition to
macroeconomic instability, this may explain why not all studies were able to trace a clear positive
relationship between financial deregulation, aggregate savings, investment and growth.
1
7. Another key issue is the sequencing of internal deregulation and external opening.  One study
on telecommunication notes, for example, that the authorities in a liberalizing country focused ondomestic rather than international traffic.  They re portedly felt that, in the absence of similar market
conditions abroad, external liberalization could undermine the incumbents' business position vis-à-vis
foreign operators.  Several studies on financial sector reform maintain that premature liberalization of
capital flows, particularly during macroeconomic instability, may compound exchange volatility and
engender capital flight.
2  By contrast, in reasonably stable economies with effective financial
supervision, deregulation proceeded smoothly in general.
8. Available information in many studies suggests that financial service consumers benefited
from a wider array of  banking schemes and services, lower service fees and higher interest rates on
deposits.  While deregulation may have amplified rural/urban disparities - one study suggests that
bank deregulation in the United States caused many locally-owned rural banks to disappear - it mightbe argued that there are other, possibly more transparent and economically efficient mechanisms to
pursue regional policy goals.
9. While few studies focus exclusively on the effects of deregulation on consumer welfare, there
is strong evidence in many sectors of post-deregulation price reductions, quality improvements and
widening product variety.  There are qualificati ons, however.  Some studies on the U.S. aviation
industry point to an increase in airfares, following some initial price reductions, as a result of rising
business concentration.  This observation has been explained in terms of economies of size (scale,
scope and density) or, in other words, of the commercial advantages of big firms over smaller
competitors.  The latter may not be able to effectively use marketing instruments such as frequent
flyer bonuses or computer reservation systems. These instruments, along with the dominance of hubs,
may have undermined the "contestability" of markets and contributed to the business power of
incumbent firms.  (By contrast, other studies sugge st that increased business concentration in the
U.S. airline industry coincided with stiffening competition.)
10. However, rising airfares or, as argued in certain studies, declining service quality are not
necessarily indicative of an anti-competitive outcome.
3  For example, a majority of passengers may
prefer higher to lower prices if the former are coupled with attractive discounts - through bonus
points - and the convenience of an efficient reservation system;  they may not be too concerned aboutless frequent traffic links being offered to geographically remote regions.  Moreover, as argued above,
                                                     
1There seems to be no unequivocal link between the volume of risky loans and interest margins.
Harper and Scheit (1992) call attention to modern finance theory, which holds that only a rise in risk relative  to
the market would influence margins.  A rise in absolute  risk, affecting all enterprises in an economy, would be
insignificant as it could be diversified through share prices.
2These issues have also been addressed in some depth by Kono, Masa et al. (1997), Opening Markets
in Financial Services and the Role of the GATS, Geneva.
3The perceived losses in service quality normally co nsist of less convenient, less reliable, or less
frequent connections being offered outside the main ro utes;  the WTO Secretariat is not aware of studies
suggesting that air safety has suffered.S/C/W/26/Add.1
Page 7
adequate compensation schemes could help to cushion reform impacts on, and ease the resistance of,
disadvantaged groups.
11. A post-deregulation increase in industry concentration does not necessarily imply economic
inefficiencies.  The emergence of larger conglomerates might be consistent with overall performance
objectives as long as the funds invested by incumbents, e.g. in flight reservation or electronic banking
systems, are recoverable.  Potential competitors would then not be unduly deterred by high entrycosts.  In addition, a point could be made that countries are not necessarily confronted with a choice
between two evils - either condoning consumer losses incurred by over-regulation or accepting
monopolistic business practices - as pro-competitive policies ("competition policy") may help to
ensure that the benefits of deregulation are effectively passed on.  However, this may presuppose a
learning process for both policy makers and regulators as traditional rules and practices may need to
be adjusted to new economic challenges - given the size and scope of some of the emerging entities -
and new technologies.  Studies on financial deregulation also suggest that it might be necessary insome countries to strengthen the administration's position, for example through institutional
safeguards, vis-à-vis large companies demanding support in difficult situations.S/C/W/26/Add.1
Page 9
II. REVIEW OF INDIVIDUAL PUBLICATIONS
A. F INANCIAL SERVICES :  BANKING
I. Publication Alawode, Abayomi A. (1992), "Financial Deregulation and the
Effectiveness of Bank Supervision in Nigeria", Savings and
Development , No. 1.
II. Sector Financial Services:  Banking
III. Policy Change Domestic Deregulation in the Nigerian banking sector in 1986.
- Entry barriers were relaxed.
- Banks were allowed to hold stocks in non-financial companies,lease equipment, and buy and sell foreign exchange.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - The number of banks increased from 40 to 124  between 1986 and
1991 .
- The number of non-bank financial intermediaries increased
significantly. These institutions are not subject to any capital-adequacy standards and their accounts are not regularly audited.The author holds that deregulation might have increased thelikelihood of dubious transactions between these and other
financial institutions.
- Banks introduced money market instruments like Certificates of
Deposit (CD) in order to mobilise funds. The author expects this tolead banks to maintain less liquid asset structures, thus riskingdifficulties in the event of unforeseen cash needs.  Instruments likeCDs link the portfolios of different banks by encouraging the
transfer of funds from one bank to another;  a default by one bank
could influence the entire financial system.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments  The paper argues that deregulation may increase the level of risk
assumed by individual institutions.  It therefore emphasizes theneed for adequate regulation in order to ensure the safety and
soundness of the financial system.  The author is also concerned
about the scarcity of qualified personnel, given the large number ofbanks in Nigeria.S/C/W/26/Add.1
Page 10
I. Publication Aliber, Robert Z. (1994), "Financial Reform in South Korea",
Korea's Political Economy , Boulder.
II. Sector Financial Services:  Banking
III. Policy Change Elimination of interest rate ceilings on bank deposits and bank
loans in the Republic of Korea in the 1980s.
IV. Rationale for Policy Reform Institutional reform was aimed at developing a system of banks and
financial institutions that would lead to more efficient and lesscostly credit allocation.
V. Results
(a) Sector-specific No comment
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper provides a normative analysis of policy reforms in
Korea. While not assessing the results of previous reforms, itargues strongly for greater liberalization of financial services inKorea.S/C/W/26/Add.1
Page 11
I. Publication Bank of Japan (1991), "Developments following the deregulation
of retail deposits in major European countries and the UnitedStates", Special Paper No. 197, Tokyo. (Translation of an article inMonthly Bulletin  of September 1990).
II. Sector Financial Services:  Banking
III. Policy Change Deregulation  of retail (small denomination) deposits in the United
States, West Germany and the United Kingdom began in the early1960s and was completed in the mid-1980s.
IV. Rationale for Policy Reform Deregulation aimed at achieving better conditions for depositors.
V. Results(a) Sector-specific - Interest rate competition in the United States and the
United Kingdom intensified soon after deregulation.  The focus ofcompetition, however, soon shifted towards offering a widervariety of products and services.  As financial institutions realised
that interest-sensitive customers were not necessarily long-term
clients, they sought to improve customer loyalty through betterservices and products.
- In Germany, interest rate competition was subdued, and banks
continued to offer deposit schemes similar to those offered before
deregulation.  The banks' response has been attributed to a well
established public pensions system and long-term price stability inGermany, which might have reduced savers' sensitivity to changesin interest rates.
- Financial institutions attempted to offset the reduction in
profitability associated with lower margins on retail deposits by
improving managerial and operational efficiency, diversifyingproducts and services and promoting economies of scope.
(b) Economy-wide No comment
(c) Consumer Welfare A wider variety of payment services and a more diversified product
combination benefited depositors in each of the three countries.
VI. Additional Comments The paper points out that the effect of interest rate deregulation on
the profitability of financial institutions depends critically on theextent to which institutions actually seek to enhance theiroperational and managerial efficiency, achieve higher returns on
portfolios and extend their business scope.S/C/W/26/Add.1
Page 12
I. Publication Basch, Miguel H. (1995), "Chile: Improving Market Mechanisms",
in M. Basch and C. Morales (eds.),  Expanding Access to Financial
Services in Latin America,  Inter-American Development Bank,
Washington D.C.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the Chilean financial market in the early
1970s.- Interest rates were liberalized and credit restrictions  removed.
- Reserve requirements were lowered.
- Only positive real interest rates were made subject to taxation.
Regulatory Reforms, 1985-93:
The 1986 reform of the General Banking Law introduced new
regulations in response to a financial crisis of the early 1980s.
IV. Rationale for Policy Reform Selective allocation of credit, before deregulation, led some
favoured sectors to obtain official  credit at negative real interest
rates. This created distortions in resource allocation, reflected in a
poor quality of projects and a contraction in financial resources.
Domestic savings fell.
Financial reforms were intended to increase savings and
investment, and improve the sectoral allocation of investment.
V. Results(a) Sector-specific - Between 1975 and 1982:  Real interest rates averaged 30%.  Total
bank credit rose from 5.6% of GDP to over 77%.  M2, a measure offinancial deepening, grew from 6% to 26% of GDP.
Total investment as a percentage of GDP declined by 5 points
relative to the 1960s. This reflected a decline in both public andprivate investment.
- Despite high real interest rates,  the share of gross national savings
in GDP declined by four percentage points from 1975 to 1981.
-  22 financial institutions, together accounting for 60% of private
bank holdings, were liquidated or taken over by the government.
- The author attributes the crisis  to flawed macroeconomic policies
and extreme bank vulnerability; excessive optimism about overallgrowth prospects and the existence of implicit deposit insuranceencouraged risky lending.
- In the aftermath of the crisis and as a result of regulatory reform,
new and less strictly regulated financial services entered the
market.S/C/W/26/Add.1
Page 13
- Between 1980 and 1992, the volume of money supply increased
significantly.
- Financial deepening, measured as the ratio of holdings and
investments over GDP, declined from 1985-92. This is reflected ina decline in bank intermediation over this period.
(b) Economy-wide Chile's economic progress since 1989 provided businesses in all
sectors with better access to the financial system. The formal
banking system, however, was less responsive to the needs ofsmaller businesses.
(c) Consumer Welfare No comment
VI. Additional Comments The study explores the argument that higher real interest rates
following deregulation promote aggregate growth as they mayprompt producers to replace old tec hnologies and raise their yield
rate.S/C/W/26/Add.1
Page 14
I. Publication Batten, Jonathan (1995), "Foreign banks and the Australian
financial system a decade after deregulation", Journal of Global
Business, No.10.
II. Sector Financial Services: Banking
III. Policy Change The Banking Act of 1959 granted foreign banks the right to
conduct licensed banking operations. In December 1992, the Actwas amended to enable foreign banks to engage in wholesale
banking through local branch networks.
IV. Rationale for Policy Reform Financial deregulation was expected to improve competition and
efficiency in previously segmented domestic markets and help tointegrate domestic and international capital markets. Foreign bankswere allowed entry to further enhance competition.
V. Results(a) Sector-specific - Although foreign banks were not very successful in terms of
profitability, they gained a moderate market share for financialassets.
- Domestically-owned banks incr eased their lending to firms of
questionable credit rating for fear of losing market shares.
- The oligopoly of banks existing before deregulation attempted to
deter entry by forgoing short-term profits;  they significantlyincreased their lending in the period 1984-86.  However, while
gaining a share of the increasing market for financial assets, they
were unable to restore their original position. New entrantsmanaged to develop long-term positions.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 15
I. Publication Berthélemy, Jean-Claude (1997), "From financial repression to
liberalization: the Senegalese experience", in K.L. Gupta (ed.),Experiences with Financial Liberalization , Kluwer Academic
Publishers, Massachusetts.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the financial sector between 1985 and
1995.- Interest rates were partially freed.- Prudential regulations were strengthened.
- The banking sector was reorganised through bank closures and
the formation of new entities.
IV. Rationale for Policy Reform Financial repression in Senegal lasted from 1960 to 1988.
-  A lack of competition with less than ten banks in operation,coupled with a low savings ratio in the period 1960-1973, impededthe development of the Senegalese financial sector.
- Large amounts of non-performing loans had accumulated in bank
accounts by 1985; nine public and private banks were almostinsolvent.Deregulation aimed at strengthening competition and bankmanagement along with the introduction of more efficientmonetary policy tools.
V. Results(a) Sector-specific - Although the banking sector became healthier, it remained
incapable of stimulating overall growth.
- Banks preferred to pile up portfolio holdings rather than expand
lending; given their excess liquidity, some banks even shied away
from accepting deposits.
(b) Economy-wide No comment
(c) Consumer Welfare Most banks demand a minimum deposit level equivalent to US$400
in order to open accounts for private clients.  The vast majority ofthe population, therefore, has no access.
VI. Additional Comments The author considers it premature to draw any definitive
conclusions from Senegal's experience with financial deregulationat this stage.
Apparently, deregulation has not yet significantly enhanced theefficiency of the financial sector.  This has been attributed to a"hysteresis" effect, implying that the previous regime of financialrepression continued to have negative effects long after itsdissolution.  The author raises the possibility that initial  financial
development in Senegal lay below the standard threshold level at
which both aggregate as well as financial sector growth are likelyto build up a positive link of mutual causation.S/C/W/26/Add.1
Page 16
I. Publication Bianchi, Andrés (1994), "Liberalización, regulación y
supervisión bancaria: notas sobre la experiencia chilena", inReformas y estructuración de los sistemas financieros en lospaíses de América Latina , México.
II. Sector Financial Services:  Banking
III. Policy Change Chile started a process of liberalization, deregulation and
privatization of the banking sector in the 1970s.  After someyears of extraordinary growth, the banking sector collapsed in1981.  Between 1981 and 1983, many private banks were
nationalized.
Over the period 1982 to 1986, prudential regulation and
supervision mechanisms were adopted:  among other things, bankportfolios were controlled;  banks were forced to insure liquiddeposits and some time deposits;  information on the sector waspublished by the supervisory authority.
Between 1985 and 1986, banks were reprivatized.
IV. Rationale for Policy Reform By the early 1970s, Chile's banking sector was small and almost
completely government-owned.  Real interest rates turnednegative as inflation rose.  Lending regulations led toinefficiencies in the allocation of resources.
V. Results
(a) Sector-specificThe system introduced in the 1970s was one of "free banking",
i.e., it relied on market-based allocation and adjustment and, in
principle, was not protected by state guaranties.  However, assome financial institutions experienced solvency crises, (1976,1978 and 1981), the Government intervened to protect formalsector deposits.  In 1976, informal entities were prohibited.
This created the expectation that deposits were de facto
guaranteed by the State and, coupled with a lack of prudentialregulation and supervision of lending, paved the way for the
financial crisis of the early 1980s.
The main characteristics of the banking sector in the late 1970s
were: extraordinary growth (the financial sector's share in GDP
was 5.3% in 1974 and 10% in 1981), extremely high real interest
rates, and massive foreign indebtedness (in 1981 the financialsector accounted for 80% of Chile's medium- and long-termforeign debt).
With new prudential rules and supervision, and aided by a soundeconomic environment, the sector has recovered rapidly since
1986.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Lack of prudential regulation is seen by the author as an
important determinant of Chile's financial crisis of the early1980s.S/C/W/26/Add.1
Page 17
I. Publication Binhadi (1994), "Financial Deregulation and Bank Supervision:
The Case of Indonesia", in S. Faruqi (ed.), Financial Sector
Reforms, Economic Growth, and Stability: Experiences in SelectedAsian and Latin American Countries,  World Bank, Washington
D.C.
II. Sector Financial Sector:  Banking
III. Policy Change - Domestic deregulation along with liberalization  of the Indonesian
banking sector in the late 1960s was followed by more ambitious
monetary and financial reforms in the early 1980s.
- Regulatory Reform in 1991:  Bank Indonesia introduced
prudential principles and improved bank supervision.
IV. Rationale for Policy Reform Liberalization of the financial system was supposed to stimulate
economic growth, promote savings through positive interest rates,and improve the quality of investment through market-basedallocation.
V. Results(a) Sector-specific - The Indonesian banking sector grew significantly in terms of
number of banks and bank offices, diversity of financial servicesand business volume.  Stiffening competition induced banks toenhance efficiency.
- The volume of deposits increased rapidly.
- The 1983 reforms in the monetary as well as financial sectors
helped to generate alternative sources of funds. Non-oil exportsbenefitted from the removal of foreign exchange restrictions andthe opening of foreign bank branch offices.
(b) Economy-wide Development of the financial sector and relaxation of monetary
controls helped to underpin economic expansion in the 1980s.  This
was associated with an enormous increase in consumption andinvestment demand, implicit in the sharp increase in imports, adeclining share of non-oil exports in total exports and increasedinflation.
- Inflationary pressures were met by a contractionary monetarypolicy which, in turn, resulted in higher interest rates and loweroverall growth.
- The volume of dubious loans increased.
(c) Consumer Welfare - Deregulation provided customers with a diverse array of banking
schemes and services.
VI. Additional Comments The paper argues strongly in favour of combining financial sector
deregulation with prudential regulation and improved banksupervision.  It also stresses the need to pursue financialderegulation in tandem with deregulation in other sectors of the
economy.S/C/W/26/Add.1
Page 18
I. Publication Bonitsis, Theologos H., and Rivera-Solis, Luis E. (1995), "External
liberalization of banking and industrial concentration: the evidencefrom Spain", The Journal of Applied Business Research, Volume
11, No. 3.
II. Sector Financial Services: Banking
III. Policy Change External liberalization of the Spanish banking sector starting in
March 1979.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific The entry of foreign banks has not contributed to lowering
domestic bank concentration in the long run.  (Domestic bankconcentration is defined as the ratio of total assets of domestically-owned banks to the total assets of all banks).
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Given that domestic bank concentration has not declined
significantly after liberalization, the authors argue that long-runcompetitiveness of the sector has not improved.S/C/W/26/Add.1
Page 19
I. Publication Buch, Claudia M. (1996), Creating Efficient Banking Systems:
Theory and Evidence from Eastern Europe, Tübingen.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the banking systems of Hungary, Czech
Republic, Poland and Estonia in the late 1980s.Most state-owned banks were privatised;  prudential regulationswere strengthened.External liberalization  in the early 1990s involved complete
liberalization of the capital account.
IV. Rationale for Policy Reform Higher real interest rates following deregulation were expected to
stimulate savings and investment, while the abolition of direct
controls was anticipated to  improve bank efficiency.
V. Results
(a) Sector-specific- The quality of financial intermediation improved as banks turned
increasingly profit-oriented and risk-aware. Credit flows were
directed more towards the private than the public sector, given
improved confidence in investment returns.
- Static and dynamic efficiency of the banking system remainedinhibited by limited competition, poor information systems, and theexistence of potentially non-performing loans. The complete
removal of entry barriers for foreign banks and the privatisation of
domestic banks were therefore delayed.
(b) Economy-wide - Overall savings and investment did not rise above pre-reform
levels.
- Increases in private sector savings did not outweigh a decline inpublic sector savings. The overall decline was higher in the CzechRepublic and Estonia than in Poland and Hungary. It needs to benoted, however, that the countries had very high levels of savingsunder socialism.
- Private household savings as a share of GDP rose significantly
immediately after liberalization. Negative real deposit rates had
previously discouraged savings. However, the author attributes thisincrease also to uncertainties about future income flows and theabolition of state social insurance schemes.  However, the level ofprivate savings could not be maintained throughout the
transformation period.
- Foreign currency holdings of households increased significantly
in the Czech Republic and Hungary. Polish households already had
sizeable foreign currency holdings before reform.
(c) Consumer Welfare Higher deposit interest rates promoted household savings.
VI. Additional Comments The impact of interest rate deregulation on aggregate savings was
contrary to expectations. The author argues that the immediate
impact of economic transformation on aggregate enterprise savingswas negative because of the decline in profitability.  Public sectorsavings declined due to revenue shortfalls as a result of tax reformand adjustment-related pressures on the social security system.S/C/W/26/Add.1
Page 20
I. Publication Carneiro Dias, Dionísio et al. (1994), "El fortalecimiento del
sector financiero en la economía brasileña", in Roberto Frenkel(ed.), El fortalecimiento del sector financiero en el proceso de
ajuste: liberalización y regulación , Buenos Aires (Centro de
Estudios de Estado y Sociedad).
II. Sector Financial Services:  Banking
III. Policy Change Financial reform  in 1964/65:
Brazil adopted a financial system based on specializedinstitutions and the Central Bank started operating as themonetary authority.
To avoid inflationary financing of public deficits, a market for
government bonds was created. Indexation arrangements were
applied first to government debt and gradually extended to thewhole economy.
Legislation allowed for universal banks in 1988. Entry criteria
for new entities were made more flexible.
Stabilization plans :
- Between 1986 and 1989, three Cruzado Plans were intended
to eliminate short-term indexation arrangements.
- Under the first Collor Plan, in 1990, indexed bonds wereexchanged for traditional government bonds.In 1991, the second Collor Plan changed the rules governingindexation;  indexed current accounts were prohibited.
IV. Rationale for Policy Reform Reforms sought to explore non-inflationary ways of financing
the fiscal deficit as well as stimulating private savings in anenvironment of entrenched inflation.
V. Results
(a) Sector-specific - Legislation provided for a highly specialized, segmented
market structure;  ensuing cost disadvantages were moderatedthrough financial conglomerates offering different servicesbased on the same infrastructure.
- A large number of non-monetary credit institutions werecreated in the 1970s.
- Between 1970 and 1986, inflation-induced profits, combinedwith the gains associated with the trading of governmentbonds, resulted in an important expansion of the financial
sector.
- Various institutions transformed themselves into universal
banks which rapidly expanded their activities.
- However, state-owned banks retained a dominant role forcredits and deposits; the Central Bank reportedly had onlylimited control over them.
- Concentration remained high both among private- andstate-owned banks.S/C/W/26/Add.1
Page 21
- Average interest rates and sp reads increased with inflation.
Despite high and persistent inflation, long-term creditremained important, provided mainly by public financialinstitutions.
- With galloping inflation and increasing uncertainty about thegovernment's response, the system became more fragile. The
terms of contracts were shortened and increasing risk
premiums factored into interest rates.
(b) Economy-wide - Indexation arrangements facilitated business activities in an
environment of high inflation. Currency substitution was
avoided as the Central Bank, in association with the financial
sector, provided indexed bonds. But the five stabilization planspursued between 1986 and 1991 failed and left permanentexpectations of massive public intervention.
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 22
I. Publication Cheng, Hang-sheng (1991), "A comparitive assessment of financial
reform in three Asian developing economies: Thailand, Indonesiaand Taiwan", Journal of Asian Economics  , No. 2.
II. Sector Financial Sector:  Banking
III.  Policy Change Domestic deregulation of the banking system in Thailand in the
1980s.Domestic deregulation followed by external liberalization  in
Indonesia and Chinese Taipei in the 1980s.
 IV. Results
(a) Sector-specific Indonesia:
- Increased competition led to a narrowing of interest margins.- Entry of foreign banks in 1988 and a general lowering of barriersto entry led to strong increases in the number of banks and size of
deposits.
- Unlike Chinese Taipei's experience, the removal of controls oninternational capital flows prior to domestic financial liberalizationdid not (immediately) affect macroeconomic stability. This isattributed by the author to appropriate macroeconomic
management.
Thailand:
- Increased competition helped to narrow interest margins. (Interestrates were not completely flexible under an oligopolistic bankingstructure).
- The publication, issued only two years after the start of financial
liberalization, was unable to determine the impact of reform onbank competition.
Chinese Taipei:
- Increased competition and narrowing of interest margins.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
V. Additional Comments While not providing a detailed analysis, the author discusses the
need for and the benefits of sequencing financial liberalization.S/C/W/26/Add.1
Page 23
I. Publication Chung, Choon Taik (1994), "Financial Sector Reforms and
Liberalization in the Republic Of Korea: Current Status andProspects", in S. Faruqi (Ed.), Financial Sector Reforms, Economic
Growth, and Stability:  Experiences in Selected Asian and LatinAmerican Countries , The World Bank, Washington D.C.
II. Sector Financial Services: Banking
III. Policy Change Interest rate deregulation  in Korea's banking system in 1965:
Nominal interest rates increased drastically.
Interest rate re-regulation  by the late 1960s.
Partial financial liberalization in the 1970s:
The market was divided into regulated and unregulated segments.Domestic deregulation and liberalization  in the early 1980s:
Domestic banking was opened to foreign entry.
IV. Rationale for Policy Reform - Low interest rates in the pre-deregulation period resulted in an
excess demand for loans. An extraordinary increase in money supply
and inflationary pressures ensued.
- Low interest rates on deposits discouraged savings.
V. Results(a) Sector-specific1965:
- Higher interest rates stimulated domestic savings and promotedmore efficient allocation of financial resources.  International
borrowing increased strongly.
- Negative interest margins seriously affected banks' profitability.  In
response, the government controlled interest rates.
1970s:- Regulatory segmentation caused unbalanced growth of financialinstitutions.
- Preferential lending led to a huge amount of non-performing loans,
excessive and inefficient investment, and stifled the banking system.
1980s:- Reduced segmentation within the financial sector stimulatedcompetition and helped to enhance efficiency.
- With the reduction of state-sponsored loans, the scale of bank
operations expanded.
-  Harmonisation of regulations helped to better integrate individualmarket segments.
- The business environment for foreign banks improved.  The returnon assets of foreign banks exceeded that of Korea's five majorcommercial banks by more than four times in 1991.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper maintains that one of the main reasons for liberalising
Korea's financial sector was the deterrent effects of low interest rateson savings.S/C/W/26/Add.1
Page 24
I. Publication Clifton, Eric V. (1994), "Financial liberalization in Israel", Paper
on Policy Analysis and Assessment, International Monetary Fund,
Washington D.C.
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation and external liberalization based on Israel's
1985 Economic Stabilization Plan.- Ceilings on foreign exchange loans to Israeli residents wereremoved.
- Maturity constraints on most loans and deposits were eliminated.
- The Bank of Israel reduced its influence on the pricing of
financial services.
- Reserve requirements were brought down to levels deemed
necessary for prudential reasons.
IV. Rationale for Policy Reform Deregulation aimed at reducing government intervention in and
segmentation of financial markets and stimulating competition.
V.  Results(a) Sector-specific - The share of "directed" bank credits, whose terms were decided
by government, fell from 55% of total bank credit in 1987 to 13%in 1993.
- The difference between the non-indexed domestic currency
borrowing and lending rates fell from 34% in 1987 to 7% in 1993.
(b)  Economy-wide In reducing public sector deficits and government intervention,
deregulation increased the efficacy and autonomy of monetary
policy.  The use of market-based financial instruments allowed theBank of Israel to conduct monetary policy primarily throughinfluencing the cost of credit rather than through administrativecontrols.
(c) Consumer Welfare No comment
VI. Additional Comments  Further and more significant initiatives to deregulate the banking
sector, remove restrictions on current account transactions, andreduce capital controls were still in progress at the time ofpublication.S/C/W/26/Add.1
Page 25
I. Publication Curtis, Wayne C. (1990), "The effects of financial deregulation on
consumer lending by foreign banks: 1982-89", The Journal o f
Private Enterprise , Vol. 6.
II. Sector Financial Services: Banking
 III. Policy Change Domestic deregulation  of the U.S. banking industry with the
passage of the Depository Institutions Deregulation and MonetaryControl Act (DIDMCA) in 1980 and the Garn-St. Germain Act in1982.
- Portfolio restrictions and interest rate ceilings were removed.
- Non-bank savings institutions were permitted a broader scope of
activity, including commercial lending, checking account and trust
operations, which were previously reserved for commercial banks.
- Non-bank institutions, particularly savings and loan associations,
were permitted to expand the share of consumer loans in theirportfolios. The Act also enabled these institutions to offer demanddeposits, such as checking accounts, to commercial, corporate and
agricultural customers.
- Restrictions maintained under interstate banking laws were eased.
IV. Rationale for Policy Reform No comment
V. Results
(a) Sector-specific - Deregulation motivated financial institutions to develop new
strategies to compete with new entrants.
- Commercial banks increased market shares in consumer lending.
- Consumer finance companies lost ground as consumers preferred
to borrow from deposit institutions (commercial banks, savingsinstitution or credit unions) with whom they already had checkingaccounts.
-  Neither savings institutions nor insurance companies could gain
significant market shares relative to commercial banks.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 26
I. Publication Diaz-Alejandro, Carlos (1985), "Good-Bye Financial Repression,
Hello Financial Crash", Journal of Develop ment Economics   N o .
19.
II. Sector Financial Services: Banking
III.  Policy Change Domestic deregulation and external liberalization in Chile began in
the 1970s.  Banks were privatized.  Reserve requirements werereduced to less than 10% of deposits by 1980.  Supervision of bank
portfolios was introduced in 1980.  Restrictions on capital flows
were relaxed in 1981.
Re-regulation  from 1983.
The Government took control over a significant share of theChilean corporate sector, intervening in five banks, liquidating
three and directly supervising the others.
IV. Rationale for Policy Reform - Development banks in inflation-ridden Latin American countries
had segmented the domestic financial markets. Favoured groups
obtained credits at negative real interest rates, while others relied
on expensive and unstable informal markets.
- Regulation of the banking system led to negative real interest
rates for depositors, thus inhibiting the mobilisation of savings and
encouraging capital flight.
V. Results
(a) Sector-specific - The banking credentials  of new entrants were not carefully
investigated.
- Relaxation of capital account restrictions resulted in massive
capital inflows by 1981.  External debt grew rapidly, mainly due toforeign borrowing by the private sector.
- Non-performing assets of banks rose from 11% of capital and
reserves at end-1980 to 113% in May 1983.
- Negligence of the current account led to a huge deficit and forced
devaluation. In turn, significant devaluation vis-à-vis the U.S.dollar in 1983 worsened the burden of dollar-denominated debt.
Comparable developments in Ar gentina, Uruguay and Chile:
- Despite the absence of explicit in surance, the public expected the
government to protect depositors from losses in the event of a
financial crash.
- The Central Banks neglected prudential regulations over financial
intermediaries, thus leading to an accumulation of risky assets in
Argentinian and Chilean banks.  In Uruguay, by contrast, the
presence of U.S. banks, regulated indirectly by the Federal Reserve,
helped to contain risk-taking
- Linkages between financial intermediaries and non-financial firmsled to the creation of oligopolies which were responsible for theincrease in private-sector debt in Argentina and Chile.  Owing to
their control over banks, non-financial enterprises had access to
both domestic and foreign credit. By late 1982, several Chileanbanks had lent at least a quarter of their resources to affiliates.S/C/W/26/Add.1
Page 27
- The increase in private financial intermediation was limited to
deposits and loans of less than six months' duration. Longer-termintermediation through banks, bonds or the stock market remainedstagnant.
- In the absence of regulation, false stock transactions contributed
significantly to the growth of financial intermediaries during 1977-
81. Large business groups reportedly manipulated the market pricesof their shares, via spurious transactions, to increase the value ofcollateral used to secure loans.
(b) Economy-wide - Although financial savings increased significantly between 1977
and 1982, there was no corresponding increase in total domestic
savings.  In fact, Chile's gross national savings fell from an averageof 16.3% of GNP in the 1960s to 12.4% during 1975-81.  Thisreflected the fact that financial savings primarily drew upon capitalinflows, accumulation of interest and capital gains, and areorientation of saving flows from the public to the private sector.
- Aggregate investment remained stagnant in Chile, Argentina andUruguay. In Chile, this was due to the shrinking share of public
sector capital formation.
- Overvaluation of the Chilean peso induced an increase in the
volume of imports and a reduction of local savings, thereby
aggravating the 1982-83 depression.
- Short-term interest rates remained very high despite massive
capital inflows in the three countries. This was due inter alia to
expectations of devaluation and inflation and a change in the real
productivity of capital.
- A decline in GDP in Argentina, Uruguay and Chile after 1980
was attributable to unfavourable external circumstances whose
impact was compounded by flawed domestic macroeconomicpolicies.
(c) Consumer Welfare No comment
VI. Additional Comments The study discusses how the combination of fixed nominal
exchange rates, relatively free capital movements and the lack of
prudential regulations led to macroeconomic instability. Strong
expansion of external debt was followed by a sudden cessation ofcapital inflows.
The paper also draws attention to the impact of financialliberalization on the stock market and, thus, on long-term creditavailability.S/C/W/26/Add.1
Page 28
1. Publication Drake, Peter J. (1997), "Financial deregulation in Australia: a
success story?", in K.L. Gupta (ed.), Experiences with Financial
Liberalization , Kluwer Academic Publishers, Massachusetts.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the Australian financial sector in the
early 1980s.- Interest rate ceilings on fixed deposits were removed and interest
rates on current account deposits introduced in December 1980.
External liberalization- Foreign banks were granted licenses from 1985.
IV. Rationale for Policy Reform The Australian banking sector had long remained stagnant with a
low ratio of financial assets to GDP.  A major volume of funds wasdirected towards government borrowing, thus constraining the
financing of industry and commerce.  By the end of World War II,
government debt was greater than the current value of GDP.
V. Results(a) Sector-specific - The anticipated entry of large international banks induced
domestically-owned banks to merge in 1981.  Four majorAustralian banks emerged.
- Stiffer competition fostered product innovation and diversificationin the banking sector.  This involved, inter alia , the introduction of
automatic teller machines, interest-bearing checking accounts andtelephone banking.
- Employment, income and career opportunities in the financialsector increased significantly.
(b) Economy-wide - Improved financing of productive activities facilitated
restructuring and encouraged investment.
- Careful scrutiny of borrowers and investment proposals  helped tocontain large-scale misallocation of funds.
(c) Consumer Welfare - Higher interest rates along with a wider variety of products made
banking more convenient and lucrative for clients.
- The removal of credit rationing improved access to bank credit forall types of borrowers and risks.
- Farmers and rural populations were adversely affected bywidespread closure of bank branches in country areas.
VI. Additional Comments The study demonstrates that deregulation yielded mainly positive
results in Australia. The removal of anti-competitive controls wasaccompanied by the introduction of new prudential regulations.S/C/W/26/Add.1
Page 29
I. Publication Ekinci, Nazim Kadri (1997), "Financial Liberalization under
external debt constraints: the case of Turkey", in K.L. Gupta (ed.),Experiences With Financial Liberalization , Kluwer Academic
Publishers, Massachusetts.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the financial sector in Turkey in 1980.
Interest rates on bank deposits were decontrolled.
A stabilization package accompanied the liberalization agenda.  It
involved measures to reduce public sector deficits, limits ondomestic credit creation, subsidy reductions, steep devaluation, anda lifting of price controls esp ecially on public enterprises.
Reregulation of deposit interest rates in early 1983.
A new Banking Law, introduced in 1985 as a result of financialcrisis, established a new regulatory and institutional framework.  ABank Supervision Unit became operational at the Central Bank in
1986.
Partial external financial liberalization in late 1983.
Controls over capital flows were removed, although only certainauthorized banks and corporations were allowed to borrow on
international markets.  In August 1989, all restrictions on capital
movements were lifted.
Partial Deregulation of deposit interest rates in 1987.  All ceilings
on interest rates were eventually removed in 1988.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - Interest rate liberalization and the ensuing rise in loan rates came
at a time when industrial firms already suffered from demandcontraction accompanying the stabilization measures.  This causedan increase in nonperforming loans.   Banks tended to ignore the
vulnerability of the average borrower;  the situation culminated in a
banking crisis in mid-1982.
- A new supervisory and regulatory framework in the financialsector apparently helped to prevent any further upheavals.
- As a result of capital account liberalization, domestic financialinstitutions became the main agents handling Turkey's external
borrowing.
 (b) Economy-wide - Although the period of free interest-rate determination culminated
in a crisis, main macroecono mic indicators, including GNP,
continued to improve during the early 1980s.
- After 1986, Turkey's external payment difficulties intensified.The economy witnessed high fiscal deficits, fluctuating growth
rates, a stagnating share of exports in GNP, an increase in the core
rate of inflation, and a deteriorating current account balance.
(c) Consumer Welfare No comment
VI. Additional Comments The study illustrates the role of regulatory and supervisory policies
in preventing financial crises.  It also discusses the sequencing ofinternal versus external liberalization.S/C/W/26/Add.1
Page 30
I. Publication Elyasiani, Elyas, and Mehdian, Syed (1995), "The comparative
efficiency performance of small and large U.S. commercial banksin the pre-and post-deregulation eras", Applied Economics , Vol. 27.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation of the U.S. banking sector in the early
1980s.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific- While efficiency indicators declined for both large and small
banks, the decline was more significant for small banks. The authorattributes this to different ad justment capabilities in response to
changes in the banking system.
- Given that small banks had traditionally been more efficient than
their larger counterparts, deregulation thus contributed toequalizing performance across groups.
- However, there was significant dispersion among small banks.
While the profitability of the average small bank fell in the 1980s,
2% of the banks within this category were able to maintain highreturns.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments  The author maintains that a deregulated banking environment may
take longer than expected to eliminate weak and inefficient banks ifthese are regionally isolated from competition or operate in niche
markets.S/C/W/26/Add.1
Page 31
I. Publication Englund, Peter; Hendershott, Patrick H.; and Turner, Bengt (1996),
"Loan-to-value ratios in Sweden: the impact of financialderegulation", Scandinavian Housing and Planning Research,
No. 3.
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation  of Sweden's credit market in the early
1980s:- Mortgage institutions were allowed to issue bonds for refinancing
of old dwellings in 1983.
- The ceiling lending rate on mortgage loans was removed.- Loan ceilings on banks were abolished in November 1985,
followed by the elimination of portfolio regulations on insurance
companies in December 1986.
 IV. Rationale for Policy Reform Regulations in the pre-reform era had been rendered ineffective by
various loopholes.
 V. Results(a) Sector-specific - The removal of lending restrictions prompted a significant
increase in total lending from banks and other credit institutions.The stock of household debt grew from 54% of GDP in 1985 to68% in 1988.
- Deregulation had three major impacts on housing finance:Mortgage institutions entered the market for second mortgages tofinance existing houses.Restrictions on bank lending to households for purposes other thanreal estate acquisition were removed.The elimination of restrictions that had required banks to invest in
bonds, helped to increase the supply of loans to the household
sector.
- Enhanced competition among banks and mortgage institutionsincreased the supply of higher-risk mortgages. Loan-to-value ratiosgrew significantly through the period 1981-1987 as banks focusedon maximising lending volumes and increasing short-term ratherthan long-term sustainable profits.
- A sharp increase in house prices after 1985, which depresseddemand for loans, resulted in a sh arp decline in loan-to-value ratios
in 1988-89.
- Sweden's credit markets suffered a severe crisis in 1991 as a result
of losses on commercial real estate lending.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 32
I. Publication Eyzaguirre, Nicolas G. (1993), "Financial Crisis, Reform and
Stabilization: The Chilean Experience", in S. Faruqi (ed.),Financial Sector Reforms in Asian and Latin American Countries ,
The World Bank, Washington D.C.
II. Sector Financial Services: Banking
III. Policy Change - Domestic deregulation in the early 1970s followed by external
liberalization in 1980 involved strong tariff reductions for goods
and the elimination of restrictions on capital flows.
- Regulatory reform after the financial crisis of the early 1980s.
The state intervened and took control of almost 64% of the capital
and reserves of the private financial sector.  A new banking law
established strong supervision and strengthened regulations ofbanking activities.
IV. Rationale for Policy Reform - Deregulation was expected to allow real interest rates turn
positive which, in turn, would promote savings, investment and
economic growth.
- Market-based interest rates and a removal of controls on credit
allocation would allow for more efficient resource allocation.
V.  Results(a) Sector-specific - GDP growth accelerated significantly between 1977 and 1980.
The financial system, however, developed certain imbalances
during this period.
- Real annual interest rates averaged 30% between 1976 and 1980,
which clearly exceeded capital yields in most sectors.
- The author maintains that a fall in the real exchange rate and tariffreductions led to a strong profit decline in the tradable goodssectors.  Producers, however, continued to perceive the situation as
temporary. Consequently, debt grew at higher rates than capital
yields.
- A speculative increase in real estate prices led to a substantial
extension of banking loans towards that sector.
 -  Consumers, expecting higher levels of wealth to follow fromhigh rates of growth, borrowed heavily.
- Banks also expected consumer wealth to increase. Besides, they
assumed that the government would ultimately cover theirliabilities. The state, on the other hand, expected the market to copewith higher risks.S/C/W/26/Add.1
Page 33
(b) Economy-wide - In the short-run, capital inflows led to exchange rate appreciation.
Increased liquidity in the economy translated into declining interest
rates and increased aggregate spending.  This led to acceleratinginflation and, in turn, a decline in the real exchange rate.
- Deteriorating terms of trade and interruptions in capital inflows in
1982 caused a severe recession.
(c)  Consumer Welfare No Comment
VI. Additional Comments The paper discusses the pace and sequencing of  international
capital liberalization. The author maintains that massive capital
inflows as a result of hasty liberalization would drive up the real
exchange rate. The consequent increase in current account deficitswould create expectations of nominal currency devaluation. Thiswould reverse the flow of capital and cause recession withinflation.Monetary authorities could avoid this situation if they purchased
foreign currency in large amounts to delink the real exchange rate
from the influence of capital inflows.The author maintains that the impact of bulk currency inflows onthe real exchange rate is particularly significant for a small countrylike Chile, owing to low price elasticity of export demand.One of the fundamental causes of the financial crisis was
inadequate financial  supervision, which allowed for high internal
and external indebtedness.S/C/W/26/Add.1
Page 34
I. Publication Fukuchi, Takao (1995), "Liberalization effect in financially
repressed economy: the case of Indonesia, 1982-90", The
Developing Economies, No. 3.
II.  Sector Financial Sector:  Banking
III. Policy Change Financial liberalization  of the Indonesian banking sector in the
early 1980s.Elimination of interest rate ceilings, reduction of  barriers to entry
and branching, and reduction of minimum reserve requirements.
As a result of liberalization, the average interest rate and the ratefor public firms increased steadily, while the rate for private firmsdecreased in the short run.
IV. Rationale for Policy Reform Financial repression had led to an underdeveloped capital market,
favouring public over private investment.
V. Results(a) Sector-specific - Public and total investment declined in the short term, but
recovered later.  Private investment increased steadily over time.Total investment increased by 58.25% over the period 1982to 1990.
- While the surplus of public firms decreased immediately after
liberalization, it began to rise in the medium term, registering anincrease of 59.17% over the period 1982 to 1990.  The surplus ofprivate firms increased steadily.
- Private saving increased by 3.3 times in 1986-90. The share ingross domestic investment increased from 62% to 84% over thesame period.
(b) Economy-wide No comment
(c) Consumer Welfare The difference between deposit and lending rates fell from over  5
percentage points in 1983 to 3 points in 1990.  Number and volume
of deposits increased significantly.
VI. Additional Comments The author emphasises the need for promoting public investment
through interest rate subsidies, given its importance for economictake-off. However, he also specifies that the dynamic positive spill-
over effects arising from public investment promotion must
outweigh the possible inefficiencies  associated with public sector
management and control.
Moreover, the paper suggests that, given the need for protectingdepositors and ensuring competent management, liberalizationshould form part of a larger package of financial reform.S/C/W/26/Add.1
Page 35
I. Publication Girg, Joachim (1996), Australiens Bankwesen im Wandel -
Einflüsse der Deregulierungspolitik auf Struktur und Standorte,Frankfurt am Main.
II. Sector Financial services: Banking
III. Policy Change Gradual deregulation and liberalization  of the Australian banking
sector since the early 1980s, culminating in the implementation of
the 1991 Martin Report ("A Pocket Full of Change - Banking and
Deregulation").  The Report called,  inter alia , for improved
regulatory surveillance and increased foreign competition toenhance the efficiency of the domestic banking sector and containthe risks associated with over-generous lending.
IV. Rationale for Policy Reform The study focuses on the external opening of the Australian
banking sector, including the granting of trading licences to16 foreign banks in 1985, and its strategic business implications forGerman banks.
V. Results(a) Sector-specificOf the five German banks previously established in Australia only
two contemplated setting up branch offices and, thus, intensifyingtheir commercial presence in the wake of the Martin Report.  Thestudy suggests that the banks' investment decisions in Australiacontinue to be made in a wider regional context, taking into
account their commercial presence in Hong Kong, Singapore and
Tokyo.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The study discusses the impact of deregulation and liberalization
policies from the perspective of already established foreign banks.Given the small number of banks concerned and the particularconditions of the Australian market, the results may not lend
themselves for general policy conclusions.S/C/W/26/Add.1
Page 36
I. Publication González Méndez, Héctor E. (1993), "Desregulación financiera
en México", Monetaria , No. 2 (Centro de Estudios Monetarios
Latinoamericanos).
II. Sector Financial Services: Banking
III. Policy Change - Between 1974 and 1981, Mexico modernized its financial
sector:  interest rates were made more flexible, mergersfacilitated and reserve requirements eased. Universal banks wereallowed.
- In 1982, the private banking sector was nationalized.
- In 1988, the financial liberalization process was reinitiated,interest rates were deregulated and foreign investment in thebanking sector was allowed (subject to certain foreign ownershiplimitations).
- In 1990, the State banking monopoly was abolished in law;prudential regulation and supervision were strengthened.Between 1991 and 1992, 18 banks which had been nationalizedin 1982 were privatized.
IV. Rationale for Policy Reform Strict regulation was seen to have contributed to the
inefficiencies that characterized the Mexican financial sector inthe 1980s.  Financial rationing had resulted in the growth of aninformal financial sector which increasingly threatened economic
stability.
V. Results
(a) Sector-specific - During the 1970s, a gradual process of concentration took place.
Business efficiency benefited from the emergence of universalbanks.
- The 1982 nationalization of the banking sector resulted inincreased concentration and further efficiency gains.  On the
other hand, the share of the banking sector in total funds raised
by the financial system declined from 96% in 1980 to 72% in1987, reflecting a loss of momentum vis-à-vis other financialinstitutions.
- In 1987, in an effort to control inflation, bank loans wererestricted. Investment needs of th e enterprise sector were partly
met by a growing stock market and the informal financial sector.
- Despite the banks' declining market share, they did not adjust
their infrastructure and employment. Competitiveness continued
to suffer.
- In 1989, the banking sector underwent a quick recovery;
interest spreads fell.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments As NAFTA had not been signed at the time of the article, the
author discusses only briefly its potential effects.S/C/W/26/Add.1
Page 37
I. Publication Grabowski, Richard L.;  Rangan, N.;  and Rezvanian, Rasoul
(1994), "The effect of deregulation on the efficiency of U.S.banking firms", Journal of Economics and Business,  No.1.
II. Sector Financial Services: Banking
 III. Policy Change Domestic deregulation  of the U.S. banking industry with the
passage of the Depository Institutions Deregulation and MonetaryControl Act (DIDMCA) in 1980 and the Garn-St. Germain Act in
1982 (see above).
IV. Rationale for Policy Reform Deregulation was expected to drive prices down to competitive
levels, remove excess profits and eliminate inefficient firms.
V. Results(a) Sector-specific - Overall efficiency as well as indicators of technical and scale
efficiency for banks declined over the period from 1979 to 1987,while allocative efficiency remained unchanged.
- During the period 1979-87, technical innovation was notsignificant for most banking firms, with the exception of those inthe US$200-400 million deposit size range.
- The author maintains that the efficiency impact of deregulation inthe banking sector is attributable more to the liquidation ofinefficient firms than to improved efficiency of existing banks.Deregulation significantly altered the composition of the bankingindustry.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Average measures of efficiency for the banking sector as a whole
indicate that efficiency and technology did not improvesignificantly. The author notes, however, that this result may mask
wide variations in individual performance.
Recession in the early 1980s might have offset certain effects of
deregulation.  The study does not seek to isolate the impact of suchfactors.S/C/W/26/Add.1
Page 38
I. Publication Gruben, William C., and McComb, Robert (1997), "Liberalization,
Privatisation and Crash: Mexico's Banking System in the 1990's",Economic Review , No. 1 (Federal Reserve Bank of Dallas).
II. Sector Financial Services: Banking
III. Policy Change Mexican banks were nationalized in 1982 in response to a financial
crisis that had led to a weakening of the peso, capital flight and an
accumulation of government debt.
Domestic deregulation  of the financial system in the late 1980s.
- Interest rate ceilings on bank loans and deposits were removed.
- Loan quotas for priority sectors were eliminated.
- Reserve requirements were phased out.- The Financial Groups Law of 1990 allowed for the operation ofuniversal banks.- 18 state-owned banks were privatised between June 1991 and July
1992.
External liberalization  in 1994 allowed for the entry of   foreign-
owned banks.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - By the early 1990s modern securities market enabled the
government, to no longer rely on commercial banks for funding.
- The number of banks increased significantly after privatisation in1991-1992, resulting in a deepening of financial markets.
Competition intensified.
- Although financial penetration increased significantly in the late
1980s and the early 1990s, by 1992, it was still as low as 46%,
compared with 97% in Canada, 93% in the United States, and 71%
in Italy. (Financial penetration is a measure of the degree to whichsavings are channelled through the financial system to providefinancing for investment).
- Banks were successful in attracting deposits and generatingprofits by 1991. However, there was a persistent degree of
inefficiency, as measured by the ratio of non-interest expense to
total assets.
- High levels of business concentration and wide spreads betweenbanks' cost of funds and their interest rate on loans continued to
cushion large incumbent institutions from the spur of competition.
- Newly liberalized banks frequently lacked the ability to evaluate
the loan and interest rate risks.  Competing for market share, theirlending increased to a point wher e marginal cost exceeded marginal
revenue.S/C/W/26/Add.1
Page 39
- The supervisory and regulatory framework was inadequate to
prevent banks from acquiring  increasingly risky loan portfolios.
(b) Economy-wide - Although Mexico's banking crisis of 1994-95 stemmed primarily
from the changes in the banking system, it was triggered by
significant currency devaluation in 1994.
- Devaluation, in turn, was prompted by an increasingly negative
current account balance. Mexico's high real interest rates, relativeto those in the U.S., had led to large inflows of foreign capital.
- The 1994 devaluation was accompanied by huge capital outflows
and high inflation. A subsequent rise in interest rates had seriousimplications for the debt that had been accumulated in the twoyears preceding devaluation. Interest  rates rose to such an extent
that banks suspended all mortgage, auto and consumer lending.
- While the 1994 devaluation exacerbated Mexico's financial sectorproblems, it improved the profitability of a large number of its
manufacturing industries.
(c) Consumer Welfare No comment
VI. Additional Comments The paper discusses problems for macroeconomic management and
financial sector supervision in the aftermath of financialliberalization.  In Mexico's case, lack of prudential regulationappears to have increased the banking sector's vulnerability,
although the crisis was precipita ted by macroeconomic instability.S/C/W/26/Add.1
Page 40
I. Publication Gutiérrez, Francisco de Pa ula (1990), "Costa Rica: intermediación
financiera y asignación de recursos";  in Carlos Massad andGünter Held (eds.), Sistema financiero y asignación de recursos ,
Buenos Aires.
II. Sector Financial Services:  Banking
III. Policy Change Credit policy in Costa Ri ca was traditionally determined by the
Central Bank, including total amount of credit, sectoraldistribution and nominal interest rates.
In 1986/87, this policy was abandoned;  interest rates weregradually deregulated and measures taken to improve thecommercial orientation of State-owned banks.  Prudentialregulation was strengthened.  However, the State's monopoly on
deposits of less than 180 days was maintained.
In 1988, the reforms were partly reversed: the Central Bank
designed a Programme of Credits, limiting global expansion andassigning sectoral credit ceilings.
IV. Rationale for Policy Reform After a severe crisis in 1981/82, low domestic savings were seen
as an important constraint on economic growth.
Results
(a) Sector-specific- Although still a minor player, the private banking sector showed
strong momentum between 1987 and 1988.  In 1988, it accountedfor 20% of total loans and 28% of time deposits in domesticcurrency.
- Sectoral growth was coupled with a large increase in the number
of banks;  the cost of financial intermediation was unusually high
by the end of the 1980s.
- Stock exchange operations became increasingly important.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 41
I. Publication Gutiérrez Pérez, A. and Pe rrotini, Ignacio (1994), "Liberalización
financiera y estabilización macroeconómica en México: desafíosy perspectivas", Investigación Económica , No. 209.
II. Sector Financial Services:  Banking
III. Policy Change - In 1982, private banks were nationalized in the wake of a severe
economic crisis.
- In the late 1980s, a process of deregulation was reinitiated;reserve requirements were reduced and private minorityownership of banks was allowed.  In the early 1990s, foreigninvestment restrictions were relaxed, banks were privatized and
interest rates deregulated.
IV. Rationale for Policy Reform During the 1980s, the banking sector focused strongly on
financing public sector debt;  it sought to avoid massivebankruptcies. There was little business momentum and domesticsaving remained low.
V. Results(a) Sector-specific - Following nationalization, with high inflation and interest rates
regulated, deposits fell from 19% of GDP in 1982 to 17% in1985.
- After 1985, the non-banking financial sector developed rapidly,
especially the stock market.
- After further liberalization moves in 1992, loan portfoliosincreased as a percentage of total assets; interest rates came
down, but remained relatively high given falling inflationexpectations.
The authors suggest that liberalization actually reinforced
oligopolistic market structures, with new banks operating in
sheltered niches.  While NAFTA is expected to strengthencompetition among financial institutions;  structural asymetries inthe banking sectors of the participating countries might benefit inparticular U.S. and Canadian banks.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 42
I. Publication Harper, Ian R., and Scheit, T. (1992), "The effects of financial
market deregulation on bank risk and profitability", Australian
Economic Papers, No. 59.
II. Sector Financial  Services: Banking
III. Policy Change Domestic deregulation of the Australian banking sector in the early
1980s.
IV. Rationale for Policy Reform Deregulation was intended to intensify competition, cause banks to
allocate their resources more efficiently and reduce costs.
V. Results(a) Sector-specificBased on modern finance theory, the paper assumes that only a rise
in risk relative to the market is of economic significance toinvestors since it is undiversifiable. An increase in absolute risk,which pertains to all enterprises, could be diversified through theshare market.
- Financial deregulation did not affect the undiversifiable risk of the
three major private banks and of the banking industry as a whole.
This might reflect the protection against adverse circumstanceswhich banks receive from the Reserve Bank.
- Since the rise in risk was diversifiable, investors were not harmed.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper seeks to gauge the  economic  significance of increased
bank risk following deregulation and identify problem cases.  Itdoes not assess other economic effects of financial sector
deregulation.
While Milbourne and Cumberworth (1991, see below) analysed the
reasons behind a post-deregulation widening of interest margins,which they attributed inter alia  to a rise in risky assets of banks,
Harper and Scheit took this analysis further to specify when the rise
in riskiness is really significant.
An interesting inference flowing from the two papers is that, since
the rise in risky assets was absolute, it caused a widening of interest
margins.
The plausibility of the authors' argument is subject to the validity ofthe economic model employed as an explanation of share prices.S/C/W/26/Add.1
Page 43
I. Publication Hawtrey, Kim; Favotto, Ivo; and Gilchrist, David (1991), The
impact of bank deregulation on Australian manufacturers, NorthRyde, NSW (Research Paper, Macquarie University, School ofEconomic and Financial Studies).
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the Australian banking sector in the
1980s.
IV. Rationale for Policy Reform Deregulation aimed at increasing competition in the oligopolistic
banking industry through licensed new entry. Policy reform alsointended to reduce the competitive disadvantages of banks vis-à-vis
non-bank financial intermediaries.
V. Results
(a) Sector-specific - New banks were unable to compete effectively in the retail market
where customers were primarily small to medium sized
manufacturing businesses.  Almost every new bank concentrated on
the large business sector.   Thus, only the large corporate customersactually benefitted from deregulation.
- The availability of finance improved on the whole as a result ofprice-based allocation rather than quantitative rationing of credit.However, large corporate enterprises had easier access to fundsthan the smaller companies.
(b) Economy-wide No comment
(c) Consumer Welfare - The increase in competition owing to the entry of foreign-owned
banks resulted in lower interest margins and charges, better serviceand a wider choice of products.
VI. Additional Comments The paper stresses that as long as substantial barriers to entry
persist (as for banks in Australia's manufacturing retail market),
deregulation may benefit only certain market segments.S/C/W/26/Add.1
Page 44
I. Publication Held, Günter (1990), "Regulación y supervisión de la banca en la
experiencia de liberalización financiera en Chile (1974-1988)", inCarlos Massad and Günter Held (eds.), Sistema financiero y
asignación de recursos , Buenos Aires.
II. Sector Financial Services: Banking
III. Policy Change The financial system in Chile was liberalized in the 1970s:
Restrictions on the establishment of foreign-owned banks wereabolished; State banks were privatized; interest rates were
deregulated.
- Significant reductions in reserve requirements increased
available funds.
- Successive increases in minimum capital requirements wereintended to improve solvency.
Between 1981 and 1986, prudential rules were introduced. Stateguarantees for deposits were substantially reduced.
IV. Rationale for Policy Reform In an inflationary environment, interest rate regulation had
resulted in negative real deposit rates and, frequently, negativeloan rates. In turn, this discouraged depositors and affected theavailability of commercial banking.  Credit allocation was
characterized by ineffici encies and distortions.
V. Results
(a) Sector-specific - Between 1974 and 1981, the number of banks more than
doubled, mostly owing to the entry of foreign-owned institutions.
- Universal banks accounted for 90% of financial sector assets in
1981.  However, the number of non-bank financial entities
increased rapidly.
- Between 1977 and 1980, the volume of loans grew five times as
fast as GDP although average real interest rates were two to three
times higher than GDP growth (1978-1980).
- In 1981, the system underwent a severe solvency crisis. After
liquidations and mergers, the number of banks was reduced to
two-thirds, and that of other financial institutions to one-third.
- Average real interest rates fell;  spreads (as a percentage of
assets) declined from almost 7% between 1978/89 to 3% between
1986/88.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The author stresses the need for adequate prudential regulation.
He feels that the banking crisis was aggravated by regulatorydeficiencies within the financial system.S/C/W/26/Add.1
Page 45
 I. Publication Humphrey, David B., and Pulley, Lawrence B. (1997), "Banks'
Responses to Deregulation:  Profits, Technology and Efficiency",Journal of Money, Credit and Banking, No. 1.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  in the U.S. banking system in the early
1980s
IV. Results(a) Sector-specific -  Increase in bank funding costs and decline in profitability.
- Banks responded to high interest costs mainly through:
(a) Cost-offset and reduction measures, focusing on fees fordeposit services and operating costs;(b) cost shifting by transferring some costs and risks toborrowers via floating rate loans;  and
(c) revenue expansion and increased provision for high-risk
debts.
 - These responses were successful in limiting profit reductions.Due to unexpected large loan losses, however, bank rates of returndid not regain their pre-deregulation level until 1992.
- As part of cost-reduction, banks sought to replace labour withnew equipment such as automatic teller machines.  The number offull-time equivalent workers per branch fell by 13% afterderegulation even though the value of core deposits per officeremained unchanged.
- Large banks relied primarily on changing deposit and loan ratesand on organisational reform to mitigate and reverse theprofitability effects of deregulation.  These measures eventuallyhelped to stabilise their profits between 1981 and 1984.From 1985, however, it was an improved business environment that
buoyed profits.
- Smaller banks, unable to change output prices and input use,
relied mainly on the improvement in economic conditions.
(b) Consumer Welfare Consumers benefited from rising average interest rates on core
deposits, which increased by 52% from the pre-deregulation period,the removal of interest rate ceilings on deposits, and theintroduction of interest-earning checking accounts.
(c) Economy-wide No comment
V. Additional Comments The paper is wider in focus than some other studies on
deregulation.  In particular, the authors:- discuss how banks respond to a deregulation-induced decline in
profits in distinguishing between bank-initiated adjustments and
external changes in business environment;  and- seek to capture the impact of adjustment strategies on core marketparameters, recognising that large banks have some control overcredit and loan conditions.S/C/W/26/Add.1
Page 46
I. Publication Humphrey, David B. (1991), "Productivity in banking and effects
from deregulation", Economic Review,  No.2. (Federal Reserve
Bank of Richmond)
II. Sector Financial Services: Banking
III. Policy Change Domestic Deregulation  in the U.S. banking system in the early
1980s.- Ceilings on interest rates (time and savings deposits) wereremoved.
- New interest-bearing consumer checking accounts were
introduced.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - Productivity growth in the banking industry decreased
significantly after deregulation.
- After the strong rise in interest rates in the late 1970s, corporate
clients significantly reduced idle demand deposits.  Banks thus
shifted to higher-cost purchased funds which raised the real averagecost per dollar of bank assets. Total factor productivity (the inverseof real average cost) fell.
- The rise in costs associated with core deposit interest rates was
not offset by reduced costs elsewhere or with an expansion in bank
output. Concerns about market shares prevented banks fromreducing operating costs.
- The profitability of the banks' deposit base fell from
US$61 billion (in constant 1988 dollars) to US$4 billion in 1988.
(b) Economy-wide Inflation in the late 1970s and early 1980s further contributed to the
rise in bank costs.
(c) Consumer Welfare Users of banking services benefited from an increase in the quality
of output.
VI. Additional Comments The study notes that low bank productivity after the 1980s did not
deprive consumers of the benefits of deregulation. The quality ofoutput, in terms of branch convenience and provision ofunderpriced deposit services, improved significantly after
deregulation. The author feels that such effects are often ignored as
they are not captured by conventional output indicators.S/C/W/26/Add.1
Page 47
I. Publication Ishikagi, Kenichi (1993), "Effects of financial deregulation on
Australian financial system", Kobe Economic and Business Review ,
Vol. 38.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the Australian financial system in the
early 1980s.- Interest rate ceilings on bank deposits (except checking accounts)
were abolished.
- The foreign exchange market was liberalized in October 1983,
with the government's decision to float the Australian dollar andrelax existing exchange controls.
- As a result of deregulation, interest rates on government securities
began to be determined by the market.
IV. Rationale for Policy Reform Regulation had restricted competition and decreased the efficiency
of financial resource allocation.
V. Results(a) Sector-specific - New domestic and foreign entry, along with other
deregulation-related changes, provided for a competitive marketenvironment.
- Mergers increased concentration not only in commercial banking,but also in other segments such as building societies and creditunions.
- Foreign banks, especially in the wholesale banking sector,expanded their market share si gnificantly over the period 1986 to
1990.
- Financial deregulation and more flexible exchange ratearrangements helped domestically-owned banks to expand theiroverseas operations.  In some cases, the entry of foreign-ownedbanks in the Australian market enabled domestically-owned banks,via reciprocity provisions, to expand abroad.
- Stiff competition between financial intermediaries increased theefficiency of the sector, promoted product innovation, and helpedto reduce bank charges as well as interest margins.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 48
I. Publication Ismail, Abdul G., and Smith, Peter (1994), "Financial Deregulation
in Malaysian Banking", Savings and Development, No. 4.
II. Sector Financial Services: Banking
III. Policy Change Domestic Deregulation in the Malaysian banking sector began as a
gradual process at the end of the 1970s and accelerated in the mid-1980s.
Interest rate regulations were gradually removed;  banks were
allowed to set their own base lending rates after 1990.
Two main categories of regulations remained effective:- Power regulations  limited foreign bank activities in the domestic
retail market. However, foreign banks were well represented in the
wholesale market.
- Quantity regulations , particularly minimum liquidity and reserve
requirements, were intended to ensure the viability of individualcommercial banks.
IV. Rationale for Policy Reform Greater reliance on market forces and prices was expected to
improve resource allocation, promote competition and accelerate
growth.
V. Results(a) Sector-specific - Liberalization of interest rates in 1978 increased competition
within the previously oligopolistic financial sector. Three different
types of banks (leader, follower and Islamic banks) emerged.
- The government encouraged mergers. Larger bank size was
expected to promote efficiency and expertise.
- Bank instability increased due to a rise in risky loans, economic
recession in 1985-86, and inefficient management practices.
- The Central Bank encouraged management restructuring and
provided loans or equity to reduce the risk of failure.
- Banks were confronted with liquidity constraints.  Greatercompetition, however, resulted in improved risk and liquiditymanagement. Highly liquid assets, such as discounted instrumentsand inter-bank funds, became available as alternatives to bank
deposits.
(b) Economy-wide Greater reliance on market forces increased the responsiveness of
interest rates to changes in monetary policy. Interest rates becamebetter indicators of future economic activity and inflation.
(c) Consumer Welfare No comment
VI. Additional Comments The study indicates that the rise in bank vulnerability after 1980
was attributable not only to deregulation, but also a range of
additional factors such as inefficient bank management.S/C/W/26/Add.1
Page 49
I. Publication Khan, Shahrukh R., and Aftab, Safiya (1994), "Assessing the
Impact of Financial Reforms on Pakistan's Economy", Pakistan
Journal of Applied Economics , Vol. X, No. 1/2.
II. Sector  Financial Services: Banking
III. Policy Change - Pakistan's financial reforms in 1990-91 involved a gradual
liberalization of banking activities as well as a rationalisation of the
interest rate structure.
- Two commercial banks were denationalized and ten new privatebanks permitted to begin operations in August 1991.
- The government introduced treasury bills and federal investmentbonds in the open market to finance public debt.
- The stock exchange was opened to foreign investors.
- In August 1992, the government abolished credit ceilings andreplaced them with a system of credit/deposit ratios, allowingcommercial banks to extend credit up to 30% of their rupee andforeign currency deposits.
- The State Bank issued a set of prudential regulations.  Banks and
non-bank financial institutions were required to respect prescribeddebt-equity ratios and limit their exposure to single companies andindividual investors.
IV. Rationale for Policy Reform Higher interest rates after financial liberalization were expected to
lead to financial deepening, pr omote investment efficiency and,
eventually, economic growth.The creation of a secondary market in government securities was
intended to obviate the need for credit controls and reduce reliance
on reserve requirement ratios.
V. Results(a) Sector-specific - The assets of the two denationalized banks grew notably.
- Higher real interest rates had an insignificant impact on savingsand financial deepening over the period 1970-90.
(b) Economy-wide - Real interest rates and investment efficiency were negatively
associated throughout the 1970-90 period.
- The correlation between growth rates and real interest rates was
negative over the same period. In this context, the authors point tothe deterrent effects of higher capital costs.
- In 1991-92, interest payments amounted to about four-fifths of the
overall fiscal deficit.
(c) Consumer Welfare Upper-income groups, representing 15% of depositors, benefited
most from higher deposit rates.
VI. Additional Comments The paper argues in favour of denationalization of banks in a
competitive environment. However, the authors do not express
support for interest rate liberalization in Pakistan, given the largecontribution of interest payments to the fiscal deficit.  Besides, theymaintain that, as savings are not significantly responsive to realinterest rates, liberalization is unlikely to spur economic growth.S/C/W/26/Add.1
Page 50
I. Publication Koo, Bon-Ho (1993), "Industrial Policy and Financial Reforms on
Korea" in S. Faruqi (ed.), Financial Sector Reforms in Asian and
Latin American Countries , The World Bank, Washington D.C.
II. Sector Financial Sector:  Banking
III. Policy Change Liberalization of Korea's financial system in the early 1980s.
- Deposit and lending rates were liberalized.
- Some entry barriers were removed, allowing for the entry of
commercial banks, as well as credit and finance companies.
- Five nation-wide commercial banks were privatised.
- Joint ventures with foreign partners were aimed at establishing
linkages with international financial markets.
- By 1982, most state loans were no longer provided at preferential
interest rates.
Reportedly, liberalization stalled in the early 1990s.  Considerable
state control in asset management of banks and non-bank financial
institutions persisted, with restrictive entry requirements andcontrols on deposit and lending rates.
IV. Rationale for Policy Reform - As the Korean economy grew structurally more complex, state
control over the financial sector was seen as a source of increasing
inefficiency.
- A dualistic financial system, underdeveloped markets and a
persistent low-interest policy, had impeded financial sector growth.
- Liberalization efforts in the early 1980s were thus aimed at
promoting private initiative and competition.
V. Results(a) Sector-specific: Rapid financial sector growth buoyed mainly by investment,
insurance and finance companies.
(b) Economy-wide - Owing to the rise in deposit interest rates in the early stages of
reform, inflation was successfully controlled.
- Low inflation and high real rates of return on financial assetshelped to increase demand for financial assets relative to goods.
- The entry of several non-bank financial institutions contributedsignificantly to an increase in domestic savings.
(c) Consumer Welfare Real interest rates on longer-term time deposits turned positive in
1965. The resulting dramatic rise in deposits came to an end whenreal deposit rates became negative in the 1970s.
VI. Additional Comments The paper indicates that, in the 1980s, the most significant
liberalization measures were still on the drawing board. The authorexpects that more liberal regulations on foreign exchange andcapital transactions would facilitate Korea's integration into
international financial markets.S/C/W/26/Add.1
Page 51
I. Publication Lamberte, Mario B. (1993), "Assessment of the Financial Market
Reforms in the Philippines: 1980-1992", Journal of Philippine
Development , Volume Xx.
II. Sector Financial Services: Banking
III. Policy Change - Restructuring of the Philippine banking system in the early 1980s
involved mergers and consolidation among banks.- Bank entry was allowed in 1989 and bank branching regulations
were relaxed in 1991.
- Interest rate ceilings on all deposit and long-term loans wereremoved in 1981, those on short-term loans in 1983.-  In the late 1980s, the Central Bank introduced rules to strengthenprudential regulations.- Deregulation of the foreign exchange market began in 1992.
IV. Rationale for Policy Reform Reforms were aimed at improving efficiency and increasing the
level of financial intermediation. Restructuring of the bankingsystem was aimed at improving the availability of medium- andlong-term funds to the industrial sector and promoting competition
in financial markets.
The efficiency of foreign exchange allocation in the pre-reform
period suffered from stringent exchange controls and restrictions oninter-bank trading. Deregulation of the foreign exchange marketwas expected to help enhance market efficiency and achieveexchange rates at levels conduc ive to macroeconomic adjustment
and long-term economic growth.
V. Results
(a) Sector-specific - The level of financial intermediation which had increased in the
early 1980s fell significantly in the mid-1980s as a result ofpolitical and economic instability.  Negative average real interest
rates on deposits for most of the period 1980-1990 also contributed
to the decline in intermediation levels.
- The share of long-term loans in total loans of commercial banksincreased in the early 1980s following the removal of interest rateceilings.
- Between 1980 and 1990, levels of bank concentration increasedsignificantly as a result of the government's encouragement ofmergers and consolidations, and high barriers to entry.
- Due to losses incurred by banks in the 1981 liquidity crisis, bankspreads declined.  After 1983, however, bank concentration led toan increase in spreads and larger profit margins.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Weak competition in the Philippine banking sector contributed to
low average real interest rates on deposits and, therefore, low levelsof financial intermediation throughout the 1980s.  The authormaintains that interest rate liberalization is liable to widen the gap
between lending and deposit rates if entry barriers are not reduced.S/C/W/26/Add.1
Page 52
I. Publication Le-Fort, Guillermo R. (1994), "The Financial System and
Macroeconomic Stability: The Chilean Experience" in S. Faruqi(ed.),  Financial Sector Reforms, Economic Growth, and Stability:
Experiences in Selected Asian and Latin American Countries,  The
World Bank, Washington D.C.
II. Sector Financial Sector:  Banking
III. Policy Change - Domestic deregulation  of the Chilean financial sector in the early
1970s involved re-privatization of commercial banks, eliminationof restrictions on interest rates and banking activities, andauthorization of new financial institutions.- External liberalization in 1980 included the removal of all
restrictions on international capital flows.
- Re-regulation  under the Banking Law of 1986.
IV. Rationale for Policy Reform Until 1973, most banks in Chile were state-controlled, real interest
rates were negative, and credit was restricted.
Liberalization of the financial system was supposed to stimulateeconomic growth, increase savings and improve the quality ofinvestment through market-based allocation.
V. Results(a) Sector-specific - In the post-reform period, distortions in the financial system
rendered it vulnerable to external and domestic shocks.  Apart from
external shocks, an unfavourable current-account position led tolarge expenditure adjustments that triggered an unprecedentedfinancial and economic crisis.
- The savings and loan systems collapsed during the period
1975-78 .
- Between 1981 and 1983, almost all private commercial banks
suffered insolvency and were taken over by the public sector.  The
vulnerability of the financial system was associated with anincreasing volume of dubious loans to clients overexposed tocurrency and interest rate risks.   Bank supervision  was almost
non-existent.
- The Banking Law of 1986 eventually sought to introduceappropriate regulation and supervision.
(b) Economy-wide - As economic agents thought that the government provided
protection against bank failures, high interest rates proved
insufficient to contain excessive spending.
- The eventual reform of the domestic financial system in 1986 andits integration into the international financial system had a positiveimpact on macroeconomic stability.
(c) Consumer Welfare No comment
VI. Additional Comments  The paper maintains that the financial liberalization process
initiated in the early 1970s was flawed as the focus was oneliminating rather than reforming existing regulations. The authoremphasizes that bank supervision and the existence of an insurancemechanism are crucial to an y liberalization programme.
Regulations are considered neces sary to prevent excessive risk
taking.S/C/W/26/Add.1
Page 53
I. Publication Llewellyn, David T. (1992), "The performance of banks in the UK
and Scandinavia: a case study in competition and deregulation",Quarterly Review , No. 3.
II. Sector Financial Services: Banking
III.  Policy Change Deregulation  of the banking sector in Scandinavia and the UK in
the 1980s.
IV. Rationale for Policy Reform Deregulation was motivated by the perceived need to improve
efficiency and competitiveness.
 V. Results
(a) Sector-specific - An increase in competit ion led to a sharp rise in bank lending
during the 1980s. In Sweden, bank advances to the non-bank publicrose by 92% between 1987 and 1991, while outstanding loans bymortgage institutions expanded by 89%.  In the UK, bank lendingto the private sector expanded at an average annual rate of 20%
throughout the 1980s.
- In the UK and Sweden, interest rate margins shrank, banks eased
credit rationing and raised risk thresholds. Profitability initially rose
to decline substantially as banks had to make massive provision for
bad debts in 1990 and 1991.  In Norway, the government took overbanks in order to avoid financial collapse.
- Similar to Scandinavia, the post-deregulation decline inprofitability in the UK was not related to any decline in operating
profits, which in fact were 48% higher in 1991 than in 1986.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper attributes the post-deregulation deterioration in financial
performance of banks in Scandinavia and the UK to a combinationof cyclical and structural factor s. It suggests that, while sudden
deregulation might lead to a more efficient, dynamic and lesscredit-rationed banking sector, it co uld also introduce an element of
instability into the system.S/C/W/26/Add.1
Page 54
I. Publication Lora, Eduardo et al. ( 1994), "El fortalecimiento del sector
financiero en el proceso de ajuste: liberalización y regulación.  elcaso colombiano", in Roberto Frenkel (ed.), El fortalecimiento
del sector financiero en el proceso de ajuste: liberalización yregulación , Buenos Aires (Centro de Estudios de Estado y
Sociedad).
II. Sector Financial Services:  Banking
III. Policy Change - Liberalization of the Colombian financial sector started during
the 1980s and was completed by 1990. However, there were
some sporadic interventions, like those in 1992.
- A system of affiliated banks was adopted in 1990 as
intermediate institutions between universal and specializedbanks.  Banks and other financial entities were allowed to invest
in these affiliates. Entry of new financial institutions was
deregulated;  restrictions on fore ign investment were eliminated;
and a privatization scheme was adopted.
- The Central Bank became autonomous in 1991.
- In 1992, various new regulations defined the structure andscope of operations of financial entities and their affiliates.
IV. Rationale for Policy Reform In the mid 1980s, the financial sector suffered a severe crisis.
Measures were taken to improve solvency, profitability andquality of assets.
The restructuring of the financial sector in the 1990s wasundertaken in the context of a broader programme of economicmodernization which included trade liberalization, theelimination of restrictions on foreign investment, labour market
reforms and the partial liberalization of the exchange market.
V. Results
(a) Sector-specific- The share of State-owned banks in total bank assets dropped
from 60% in 1989 to 37% in 1992.
- Spreads varied greatly over time and between intermediaries.
For banks, they had been falling since the mid-1980s;  the authors
suggest that limited competition might inhibit further reductions.
- Persistently low levels of productivity and efficiency might beexplained by entry and exit barriers and/or strong segmentation inthe sector.
- Financial deepening (i.e. the role of the formal sector infinancial intermediation) has remained relatively low.
(b) Economy-wide No comment
(c)  Consumer Welfare No comment
VI. Additional Comments The need for macroeconomic stabilization complicated efforts to
reform the financial sector. In particular, to contain capital
inflows after exchange rate liberalization (at a time of highdomestic interest rates), the government introduced high reserverequirements and temporarily regulated interest rates.S/C/W/26/Add.1
Page 55
I. Publication Marshall, Kathryn G. ( 1994), "Competition and growth: changes in
Indonesia's banking sector since 1988", Journal of Asian Business ,
Volume 10, No. 3.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  of the Indonesian banking sector since the
early 1980s.- Interest rate controls on time deposits in state-owned banks werelifted and credit quotas eliminated in 1983.
- The 1988 reforms eased branching restrictions and allowed for the
licensing of both private domestic and joint venture banks.
- The government lifted its guarantee on time deposits in state-
owned banks and stressed its resolve not to support insolvent banksin order to discourage excessive risk-taking in an increasingly
competitive environment.
IV. Rationale for Policy Reform No comment
V. Results
(a) Sector-specific- The 1983 deregulation package prompted a dramatic increase in
the size of private banks, accounting for most of the growth in totalbank assets during the period 1983 to 1988.
- By 1992, the number of banks had doubled and the averagenumber of branches per bank risen from 8 to 21.
- The growth of total bank assets increased from 13% per yearduring 1984-1988 to 31% per year from 1989 through 1991.
- Priority lending as a share of total state bank lending fell from37% in March 1990 to 23% in December 1992.
- Although the 1988 deregulation allowed for a significant numberof new entrants, the growth in assets after 1988 was attributablemainly to the expansion of previously established private banks.By 1992, these banks were typically about seven times larger thanthe new entrants.
- Increased competition as a result of the 1988 deregulation induceda decline in bank profits, including those of larger incumbentbanks.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
 VI. Additional Comments The paper, completed prior to the recent financial turmoil,
compliments the government's decision to withdraw depositprotection in order to discourage excessive risk-taking in a period
of rapid expansion and growing competition.S/C/W/26/Add.1
Page 56
I. Publication McCallie, John Douglas (1990), The impact of deregulation and
deposit insurance on the thrift industry: an empirical analysis, Ph.D.dissertation, Auburn University, Alabama.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation  in the United States with the passage of the
Depository Institution Deregulation and Monetary Control Act(DIDMCA) and the Garn-St. Germain Act (GARN) in the early 1980s.
- The thrift industry was allowed to increase lending in areas otherthan home mortgages and provide interest-bearing transactionaccounts.
- The DIDMCA increased the maximum coverage of federal depositinsurance from US$40,000 to US$100,000
IV. Rationale for Policy Reform Before the 1980s, regulations helped to preserve a profitable niche
market for thrift firms and condone inefficiencies.
V. Results(a) Sector-specific Since the beginning of the 1980s, more than 500 thrift firms failed;
the ensuing costs were estimated at over US$1 trillion.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper discusses whether the crisis in the thrift industry was
associated with the continued existence of federal deposit insuranceafter deregulation or deregulation itself.
The first hypothesis maintains that a flat-rate deposit insurance
implicitly subsidized riskier loans as subsequent losses were partly
passed on to the taxpayer.  This reduced the incentive for the industryto thoroughly scrutinize investment risks. The deregulation hypothesisholds that it was primarily a lack of government control as a result ofthe deregulation laws of the 1980s which caused an increase in
business failures.
Empirical tests conducted by the author indicate that deposit insuranceis itself an important source of financial instability.  A strong positive
relationship was found to exist between the level of insurance and themagnitude of the thrift problem.  This relationship has far greaterempirical significance (by a factor of up to two) than the combinedeffect of DIDMCA and GARN, the two deregulatory legal acts.  The
author thus advocates reforms of the system of deposit insurance.
Deregulation was found to be an important factor in explaining the
number of thrift firm failures.  Considering that each firm had
relatively few assets, this suggests, however, that the extent of the
crisis can not be blamed on deregulation as such.  Failures can be
interpreted as a result of post-deregulation competition which leads tothe elimination of less efficient companies.
The author feels that a policy of nationwide branch banking would
help to ensure stability in financial markets.  Confidence in institutions
might then be achieved through diversification and prudentmanagement rather than by deposit insurance schemes.S/C/W/26/Add.1
Page 57
I. Publication McLeod, Ross H. (1996), "Control and Competition: Banking
Deregulation and Re-Regulation in Indonesia", Working Paper
(No. 96/7), Department of Economics, Research School of Pacificand Asian Studies, Canberra.
II. Sector  Financial Services: Banking
III. Policy Change Domestic Deregulation in Indonesia's banking sector since the
early 1980s; interest rate controls on time deposits in state banks
were lifted; controls on the lending of all banks were removed andmost subsidised loan programs were terminated.
External liberalization in October 1988 involved the opening of the
sector to new private domestic banks and joint-venture banks withforeign participation.Restrictions on the domestic banks' access to foreign exchange
licences were eased.
Minimum reserve requirements were significantly reduced.Controls on banks' overseas borrowing were removed in March1989. At the same time, prudential regulations were widened toinclude limits on foreign exchange exposure.
All remaining subsidised loan programs were terminated by 1990.
Foreigners were allowed to buy shares in domestic banks listed onthe stock exchange from February 1992.
Re-regulation of the banking sector in the mid-1990s
Controls on bank lending were imposed;  minimum reserve ratioswere increased;  licensing procedures for new bank branches weretightened;  and lending by non-banks and non-intermediatedfinancial institutions was made subject to prudential control.
IV. Rationale for Policy Reform The Indonesian banking sector was dominated by five state
commercial banks throughout the 1970s. Restrictions on theestablishment of new private (domestic and foreign-owned) banks
and on the expansion of existing branch networks stifled
competition.   Deregulation was aimed at terminating state-sponsored loan programs and exposing state banks to competition.The re-introduction of lending controls in the mid-90s was intendedto contain excessive growth of bank lending which was seen as a
major source of inflation.
V. Results(a) Sector-specific - The volume of time deposits (as a percentage of nominal GDP)
increased significantly in 1983 as a result of the removal of interestrate controls.  Between 1990 and 1992, foreign currency depositsalso grew rapidly.
 - New domestic and foreign joint ventures were established and
several private banks opened new branches.
(b) Economy-wide The persistence of inflation, seen as resulting from an increase in
bank lending, provided the rationale to strengthen controls of thefinancial sector.  The author, however, rejects the possibility that an
increase in financial intermediation could have had inflationary
consequences since it involved a redistribution of spending powerbetween entities, but did not increase total spending.
(c) Consumer Welfare - Improved competition enhanced the quality of financial
intermediation and payment services.S/C/W/26/Add.1
Page 58
VI. Additional Comments Involvement of the major banks in large-scale currency and real
estate speculation in 1990 led to a slowing down of thederegulation process.  The author holds that the consequentbankruptcy of these banks resulted not from a lack of prudentialregulation but from the banks' violation of existing rules.  Heattributes excessive risk-taking by banks to the Central Banks'
inability to enforce regulations and ensure compliance with
prudential standards.S/C/W/26/Add.1
Page 59
I. Publication Milbourne, Ross D., and Cumberworth, Matthew (1991),
"Australian banking performance in an era of deregulation",Australian Economic Papers,  No. 57.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation followed by liberalization.
Relaxation of regulations in the Australian financial system in twostages over the period 1980-88:- Phase I:  Removal of interest rate ceilings and portfolio
restrictions.
- Phase II:  Introduction of foreign banks in 1985.
IV. Rationale for Policy Reform Deregulation was expected to promote efficient resource allocation
and cost savings.
V. Results
(a) Sector-specificShort-run implications:
 - The initial stages of competition, following deregulation, saw a
decline in profit rates.  This was attributable mainly to attempts bybanks to increase their market share through high deposit interestrates and/or a reduction in lending rates.
Long-run implications:- With the entry of foreign banks in 1985, profit rates declined
further (from 18.1% to 12.8% over the period 1980-88).  However,
inconsistent with  a priori expectations, interest margins actually
widened with foreign bank entry.
- The widening of interest margins as well as the narrowing of
profits since 1985 are both attributed to increased extension ofrisky loans.
- A decline in unit labour costs as well as a 25%-reduction in theratio of operating expenses to assets testifies to increased efficiencyof the banking sector through 1980-88.
- Over the period 1983 to 1989, employment in the financial sectorrose by 27% relative to other sectors.
However, while deregulation generated a highly competitivewholesale banking sector, retail banking remained dominated byfour banks.  According to the authors, this reflects high fixed costsand natural barriers to entry.
(b) Economy-wide No comment
(c) Consumer Welfare Consumers benefitted from more efficient financial intermediation.
VI. Additional Comments The authors discuss the role of risky loans in determining both
interest as well as profit margins.  They provide insights into how,contrary to expectations, interest margins may increase with
deregulation.S/C/W/26/Add.1
Page 60
I. Publication Milkove, Daniel L, and Sullivan, Patrick J. (1990), "Deregulation
and the Structure of Rural Financial Markets", Rural DevelopmentResearch Report, United States Department of Agriculture,Washington D.C.
II. Sector Financial Services: Banking
III. Policy Change Domestic Deregulation of the U.S. financial system in the early
1980s. Restrictions on bank branching were eased.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific- The number of locally-owned rural banks declined due to mergers
and failures.
- The majority of the 484 banks that failed between 1983 and 1987were located in rural communities and had above-average ratios offarm loans.  Most of these banks were small and located in Statesthat restricted bank branching.  Lack of geographicaldiversification, compounded by volatile interest rates and
mismanagement, eventually disabled locally-owned rural banks
from meeting other credit demands.
- Financial services in most rural communities remained intact asfailed banks were taken over as branches by other banks orrestarted under new owners, usually urban-based bankingorganisations.
- Although deregulation did not directly affect the total number ofbanks in most rural markets, it significantly altered the structure oflocal banking.  During 1980-86, although the number of rural bankoffices increased, the number of banking firms operating in ruralAmerica declined, leaving borrowers vulnerable to oligopolistic
lending behaviour.
- Within the rural bank portfolios of urban-based banks, the size of
commercial and industrial loans was significantly larger than thatof agricultural loans.
- The rural banking system became less geographically specialized.During 1980-86, the number of single-office banks declinedsharply as a result of new liberali zed branching laws.  The ensuing
diversification of rural banks reduced the pre-deregulationvulnerability to credit problems in the event of a local economic
downturn.
(b) Economy-wide No comment
(c) Consumer Welfare After restrictions on bank branching were eased in the 1980s, a
larger proportion of rural communities came to be served by a
combination of local and urban banks.  On average, however, ruralborrowers did not have access to a similar range of banking serviceproviders as urban borrowers.S/C/W/26/Add.1
Page 61
VI. Additional Comments The report discusses whether bank deregulation has increased rural
communities' reliance on regional and national banks.  Locallyowned banks are deemed critical to rural economic developmentsince rural bankers are more familiar with local residents and theirbusinesses.  Experts have argued that large urban-based bankswould transfer rural deposits for use in cities where lending
opportunities are better and returns higher.  At the same time,
however, larger banks offer a wider variety of financial servicesand provide greater deposit security as a result of geographicaldiversification.
The authors concede that the net impact of these effects remains tobe analysed.S/C/W/26/Add.1
Page 62
I. Publication Naughton, Tony, and Harvey, Charles (1996), "The performance of
foreign banks in a deregulated environment: evidence fromAustralia and Korea", Economic Papers, No. 1 (Economic Society
of Australia).
II. Sector Financial Services: Banking
III. Policy Change The Korean banking sector was characterised by strict government
control over ownership, interest rates and priority lending.Although approximately 70 foreign banks operated in Korea'sdomestic market in 1995, the banking system remained tightly
regulated.
Liberalization initiatives:  Over the period 1967 to 1983, several
foreign banks entered the domestic market.  They were not allowedto open new branches and their capital was subjected to strictrestraints.  In 1984, restrictions (as well as privileges) for foreignbank operations were eliminated.  In 1990, the Korean-U.S.
Financial Policy Talks resulted in an acceleration of external
liberalization.
Australia's financial deregulation, beginning in the early 1980s, wasfaster and more extensive.  It included significant changes in theexchange rate and interest rate regimes and the banking sector'sstructure and operation. An open policy adopted in 1992 allowedalmost any foreign bank to operate a licensed branch in Australia.
IV. Rationale for Policy Reform Foreign banks were  provided access to the Korean financial market
as part of a strategy to attract foreign capital and facilitate exportsof domestic manufactured goods.
Australia's liberalization programme was genuinely intended to
promote efficiency and competition in domestic financial markets.
V.  Results(a) Sector-specific Republic of Korea:
- The volume of deposits and loans grew very rapidly over the
period 1970 to 1992.  Korea's traditional balance of payment deficitturned to a large surplus in 1986, reducing the volume ofbusinesses conducted by foreign banks. Foreign currency loans
offered by foreign banks decreased by 26.5% between 1987 and
1990. The market share of foreign banks tended to decline through1985-89, despite the extension of national treatment.
Australia:
- The sudden increase in competition from foreign banks in the
1980s led domestically-owned banks to significantly expand their
lending to the corporate sector. Bad loans resulted in huge lossesfor certain banks.
- Reflecting the increase in risks associated with an expansion inlending, interest margins rose even though average operating costs
fell.S/C/W/26/Add.1
Page 63
- The entry of foreign banks helped integrate Australia into Asia-
Pacific financial markets. It facilitated both outward and inwardinvestment and contributed significantly to the development of oneof the world's major foreign exchange sectors.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
 VI. Additional Comments Korea's and Australia's deregulation policies illustrate contrasting
approaches in terms of motivation, pace and  extent of change.S/C/W/26/Add.1
Page 64
I. Publication Noya, Nelson, and Dominoni, Daniel (1994), "El fortalecimiento
del sector financiero en el proceso de ajuste: liberalización yregulación. El caso uruguayo", in Roberto Frenkel (ed.), El
fortalecimiento del sector financiero en el proceso de ajuste:liberalización y regulación , Buenos Aires (Centro de Estudios de
Estado y Sociedad).
II. Sector Financial Services:  Banking
III. Policy Change - Liberalization  of the economy between 1974 and 1979:  the
exchange market was liberalized;  restrictions on internationalcapital movements were removed;  interest rates werederegulated;  restrictions on bank lending and on foreigncurrency trading were eliminated;  compulsory reserve
requirements and rediscount operations were abolished;
refinancing requirements and credit ceilings per client were mademore flexible;  and entry requirements for new entities wererelaxed.
- In 1982, after a severe financial crisis, the Central Bankacquired an important amount of the non-performing loans of theprivate banking sector. Domestic private banks largelydisappeared by the end of the 1980s.
- From 1989, prudential regulation was based on therecommendations by the Basle Committee.
- In 1991, minimum reserve requirements were reformulated, thesame rules applied to private (foreign-owned) and state-ownedbanks.
- The Central Bank was given more supervisory powers in 1992.
The government was no longer committed to act as a lender of
last resort.
IV. Rationale for Policy Reform After the 1982 crisis, private financial intermediaries were very
hesitant to extend loans to domestic firms.  By contrast, relyingon government guarantees, State-owned banks acted with littleprudence.  The reforms in the late 1980s were aimed atstrengthening market-based intermediation.
V. Results
(a) Sector-specific- Financial intermediation increased rapidly during the 1970s.
However, this was based mainly on capital inflows rather than on
an increase in domestic savings.
- By the end of the 1980s, private banks concentrated on largecredits and deposits, had few clients, small networks and few
employees. State-owned banks took care of both individual small
accounts and high-risk firms.
- While interest rates and margins had always been larger andmore volatile in pesos than in dollars, the difference increased
after 1990.S/C/W/26/Add.1
Page 65
- By the mid 1990s, dollar-denominated credits accounted for a
very large share of bank lending.
More recently, the business segmentation between public and
private banks seemed to be breaking down. However,mobilization and use of domestic savings for investment has
remained week.
(b) Economy-wide As the financial sector intermediates mainly in dollars, the
exchange risk continues to lie with the individual firms. In turn,
this seems to result in greater macroeconomic instability, as thereis a more direct influence of exchange rate changes on borrowingand investment decisions.
(c) Consumer Welfare No comment
VI. Additional Comments  The study suggests that the virtual disappearance of the domestic
banking sector had important consequences for resourceallocation.  For a variety of reasons, foreign-owned banks tended
to be more risk averse than domestic banks.S/C/W/26/Add.1
Page 66
I. Publication Penner, R. (1994) "Financial Liberalization in an Agrarian Economy:
The Case of Paraguay" in S. Faruqi (ed.), Financial Sector Reforms,
Economic Growth, and Stability:  Experiences in Selected Asian andLatin American Countries, The World Bank, Washington D.C.
II. Sector  Financial Sector:  Banking
III. Policy Change Financial Reform, 1989-92:
External liberalization involving a free-floating exchange rates,
current and capital account liberalization.
Internal liberalization of interest rates and credit allocation.
Banking supervision under which the Central Bank increased the
minimum capital requirements for banks and financial companies.
Monetary and fiscal management included budget control and a
reduction of public sector loans.
IV. Results(a) Sector-specific- Rise in real interest rates to over 10%.
- Increase in gross domestic savings.
- Extension of bank intermediation, particularly in foreign currency.
- Banks expanded their loans to the private sector, reflecting not only
increased intermediation activities, but also the reduction of public
sector expenses.
- Re-direction of credit flows from development loans for primary and
manufacturing activities to consumer loans.
(b) Economy-wide - Inflation declined from 44.1% in 1990 to 17.8% in 1992.
- Increase in gross domestic savings helped to achieve monetary
targets.
- Economic recession in 1991 resulted in lower economic growth
along with increasing unemployment. The positive impact of post-1989 macroeconomic stabilization could not overcome the negativeeffects of the agricultural crisis induced by a fall in farm prices.
- The financial resources generated by increased domestic savings didnot benefit core economic activities like farming.
(c) Consumer Welfare No comment
V. Additional Comments The paper advises against financial liberalization in an unstable
agrarian economy.  Financial libera lization brought about a decline in
the real flow of funds from commercial banks to the plantations;banks preferred to invest their assets in less risky activities such asexport financing.S/C/W/26/Add.1
Page 67
I. Publication Perez-Campanero, Juan, and Leone, Alfredo M. (1991),
"Liberalization and Financial Crisis in Uruguay, 1974-87" inBanking Crises , Washington, D.C.
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation  and external liberalization  of the Uruguayan
financial sector in the mid and late 1970s:- Liberalization of international capital flows preceded  liberalization
of domestic financial markets.- Financial liberalization involved lower reserve requirements and
entry barriers, the removal of interest rate ceilings and elimination
of prudential regulations concerning maximum financing and riskconcentration.
Regulatory Reform  in 1989:
Extensive financial sector reform involved rehabilitation andliquidation of insolvent banks. Moreover, accounting rules forfinancial institutions were reviewed and the regulatory andsupervisory role of the Central Bank was strengthened.
IV. Rationale for Policy Reform During the pre-deregulation period, negative real interest rates
encouraged capital flight and led to  the contraction of the financial
market.The economy was characterised by low GDP growth, high inflation,
low level of domestic savings, recurrent balance of payment crises,
growing fiscal deficits, and high unemployment.Deregulation was expected to remove distortions in domesticmarkets and eliminate fiscal imbalances.
V. Results
(a) Sector-specific - Fast liberalization of capital transactions promoted capital inflows
and a surge in borrowing, particularly in foreign currency.
- Foreign currency deposits grew much faster than domestic
currency deposits, increasing about six times between 1974and 1977.
- The spread between lending and deposit interest rates declined
after 1976.
- Real interest rates were extremely volatile between 1976 and 1985owing to exogenous factors such as international interest rates andtradable goods prices.  The debt-service burden of Uruguayan firmsincreased as real interest rates shot up within a short time-span.
- Devaluation in Argentina significantly reduced confidence in thesustainability of the Uruguayan exchange rate regime. In responseto increasing interest rates, firms began to heavily borrow dollars.
-  Net earnings of firms declined, reflecting an increase in financial
costs.  Further borrowing was intended to offset the decline in
internal sources of funds.S/C/W/26/Add.1
Page 68
- Devaluation of the peso, rise in interest rates and the build-up of
foreign currency debt precipitated a financial crisis in early 1982,leaving many banks insolvent.
- The absence of adequate banking supervision exacerbated the
crisis.
(b) Economy-wide - Delayed removal of barriers in domestic commodity and labour
markets complicated monetary policy management and translated
into high inflation in the early reform years.
- Domestic savings were not significantly influenced by financial
liberalization.
- The ratio of private investment to GDP increased in response to
the rationalisation and reduction of profit taxes as well as theelimination of quotas on imports of capital goods.
- The efficiency of investment improved, reflecting improvedallocation of credit, better utilization of capacity, rapid growth in
less capital-intensive industries and reduced restrictions on imports
of capital goods.
(c) Consumer Welfare No comment
VI. Additional Comments  The paper discusses the need for macroeconomic stability and
banking supervision to ensure successful financial liberalization;the factors that caused Uruguay's financial crisis were bothmacroeconomic and regulatory in nature.  The authors elaborate on
the pace and sequencing of financial relative to trad e liberalization
and the liberalization of capital transactions.S/C/W/26/Add.1
Page 69
I. Publication Phylaktis, Kate (1997), "Fin ancial liberalization and stabilization
policies: the experience of Chile", in K.L. Gupta (ed.), Experiences
with Financial Liberalization , Kluwer Academic Publishers,
Massachusetts.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation of the financial sector in the early 1970s.
- Interest rates were completely freed and reserve requirementslowered in 1975.
External liberalization
- Capital account liberalization began in 1974 and intensified in1979.- To encourage foreign direct investment, restrictions onrepatriation of profits, dividends and royalties were relaxed in
1977.
IV.  Rationale for Policy Reform The general thrust of reforms was to strengthen the role of
economic incentives, thus restoring economic growth, rationalizingresource allocation and reducing the budget deficit.
V. Results(a) Sector-specific - Nominal and real interest rates remained high throughout the
period of reform.  Demand for credit was inflated by requests fromunprofitable firms that continued to borrow in order to avoidbankruptcy.  The general public, encouraged by expectations of
high long-term growth, increased credit-financed spending.  High
demand for credit further raised domestic interest rates, therebycreating incentives to borrow abroad.
- Rising interest rates ultimately consigned many creditors and their
banks to insolvency.  As the situation was further compounded by
inadequate banking supervision, a financial crisis began in 1981.The number of bankrupt financial institutions reached 810 by end-1982.
(b) Economy-wide - The liberalization of  the capital account in 1979 was followed by
a significant increase in foreign indebtedness.  Capital inflows
increased as a result of unrealistic profit expectations and relativelyhigh domestic interest rates.
- Under the pegged exchange-rate regime, the increase in capitalinflows resulted in an increase in money supply  and inflation.
- Failure to reduce inflation weakened the credibility of
stabilization and liberalization efforts.
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 70
VI. Additional Comments The study raises questions about the appropriate timing, pace and
sequencing of financial liberalization.  It discusses the possibledestabilizing effects of capital inflows following rapidliberalization of the capital account.
The author argues in favour of gradual liberalization, which would
spread increases in foreign debt over time and avoid abrupt real
currency  appreciation.  He feels that the Chilean authorities werewell advised to liberalize the domestic financial market by freeinginterest rates before abolishing foreign exchange restrictions.However, in his view, weak bank supervision and insufficientprudential regulation, along with free state deposit insurance and
macroeconomic instability, led to  the crisis after interest rates had
been completely liberalized within a short period of time.S/C/W/26/Add.1
Page 71
I. Publication Rezvanian, Rasoul; Rangan, Nanda; and Grabowski, Richard
(1992), "Market structure and banking production economies:evidence from the 1980s deregulation", The Journal of Applied
Business Research, No. 3.
II. Sector Financial Services: Banking
III.  Policy Change Domestic deregulation  of the U.S. banking industry with the
passage of the Depository Institutions Deregulation and MonetaryControl Act (DIDMCA) in 1980 and the Garn-St. Germain Act in
1982 (see above).
IV. Rationale for Policy Reform Interest rate ceilings and geographic limitations on bank expansion
limited the potential to exploit economies of scale.  Regulation onproducts hampered the realization of economies of scope.
Deregulation was intended to remove these constraints.
V. Results
(a) Sector-specific - The study suggests that large banks succeeded in reaping
economies of scope, thus benefitting from the cost advantageassociated with joint production of different outputs.
-  Examination of scale economies indicates a relative increase in
optimal bank size from 1979 to 1987. (However, the cost functionsfor the sample of banks under consideration for the years 1979,1983 and 1987 were statistically different).
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments  While the study attributes the realisation of scale and scope
economies primarily to deregulation, it also draws attention to theimpact of technology in helping banks increase their optimal size
and diversify their product base.S/C/W/26/Add.1
Page 72
I. Publication Rozenwurcel, Guillermo, and Fernández, Raúl (1994), "El
fortalecimiento del sector financiero en el proceso de ajuste: elcaso argentino", in Roberto Frenkel (ed.), El fortalecimiento del
sector financiero en el proceso de ajuste: liberalización yregulación , Buenos Aires (Centro de Estudios de Estado y
Sociedad).
II. Sector Financial Services:  Banking
III. Policy Change Plan BONEX:
In 1990, bonds in domestic currency which represented basicallyall short-term debt of the public sector were exchanged fordollar-denominated bonds.
Convertibility Plan in 1991:
- free convertibility of domestic currency;
- financial entities were allowed to issue loans in dollars or pesos;- deregulation of the stock market (financial entities and firms were
allowed to issue tradeable bonds in foreign currency);  and
- tax reform, including improvements of the tax collection system.
IV. Rationale for Policy Reform The 1980s were characterized by high and growing domestic debt
of the public sector and low private savings.  Investors increasinglyfavoured foreign assets.
V. Results(a) Sector-specific- The Argentinian financial sector consisted of a large number of
entities.  Although indicators of productivity had improved overtime, by 1992 they were still low by international standards.
- Before the reforms, public banks accounted for 50% of depositsand 63% of loans.  While falling since 1990, they still held majorshares in 1992.
- Real interest rates on debts and loans continued to exceedinternational rates. Spreads, although falling, remained high.  Thisis attributed by the authors, among other things, to high costs ofintermediation. Rates were especi ally high for consumer credits
and loans to small and medium-sized enterprises.
(b) Economy-wide - Hyperinflation ended in March 1990. Despite continued
inflationary pressure, deposits started to increase by mid-1990.
- Monetization of the economy was reduced to minimum levels:M3 amounted to only 4% of GDP during the first quarter of 1990.The fiscal deficit came down.
While inflation fell after 1987, M3 grew to 17% of GDP, reachingagain the level of 1986.  Capital inflows allowed for significantcredit expansion and helped to reduce domestic interest rates.S/C/W/26/Add.1
Page 73
- The recovery process went along with renewed inflationary
pressures, currency overvaluation and a worsening of the currentaccount and the balance of payments.  While consumptionexpanded significantly, investment increased only slightly.
(c) Consumer Welfare No comment
VI. Additional Comments The publication traces the Argentinian economy's short-term
response to improved monetary and financial conditions within an
increasingly liberal regulatory framework. Although the system
has regained consumer confidence, domestic savings continued tofall short of the capital needs associated with strong investmentand economic growth.S/C/W/26/Add.1
Page 74
I. Publication Soyibo, Adedoyin, and Aadekanye, Femi (1992), "Financial system
regulation, deregulation and savings mobilization in Nigeria", Nairobi(AERC Research Paper).
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation  of the Nigerian financial system in
August 1987.
- Interest rates were decontrolled.
- The policy of directing credit toward s sectors with high social rates
and low commercial rates of return was relaxed.
IV. Rationale for Policy Reform Deregulation was based on the premise that reasonably high ex ante
real interest rates encourage savings and, thus, promote economicgrowth.
V. Results(a) Sector-specific No comment
(b) Economy-wide - The paper finds a weak positive correlation between financial
liberalization and aggregate savings in Nigeria.
- It suggests that ex post  rather than ex ante  real interest rates are
significant determinants of savings and real money demand.  ( Ex ante
real interest rates account for expected  inflation while ex post  rates are
based on actual inflation).
(c) Consumer Welfare No comment
VI. Additional Comments The study explores the relationship between financial liberalization
and the mobilisation of aggregate savings. It does not elaborate on the
impact of liberalization on other macroeconomic variables.S/C/W/26/Add.1
Page 75
I. Publication Sheng, A. (1996), "Financial Liberalization and Reform, Crisis and
Recovery in the Chilean Economy, 1947-87" in A. Sheng (ed.),Bank Restructuring: Lessons From the 1980s , World Bank,
Washington, D.C.
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation  and external liberalization of the Chilean
financial sector in the 1970s.
Reforms included bank privatisation, licensing of financialservices, reduction of banks' reserve requirements, creation ofindex-linked financial instruments, gradual freeing of capital flowsand elimination of interest rate ceilings, abolition of most credit
allocation controls and of barriers to entry.
IV. Rationale for Policy Reform No comment
V. Results
(a) Sector-specific- Financial intermediation expanded considerably with financial
assets rising from 20% of gross national product in 1975 to 48% in
1982.
- Excessively high real interest rates (averaging 77%), went along
with the proliferation of distress borrowing during the period 1975-82.
- The volume of capital inflows grew significantly throughout the1970s.  By 1982, external debt stood at 70% of GDP.
- The banking system grew highly concentrated with the fivelargest banks accounting for 45% of total credit and 66% ofnonperforming loans.
- Widespread financial instability through the period 1973-81culminated in an economic crisis in 1981-83.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 76
VI. Additional Comments  The study highlights the financial, monetary and economic policies
that translated into rapid expansion and excessive risk-taking bydomestic and foreign financial institutions, which extended largeloans to undercapitalized and highly indebted firms.  The authormaintains that highly leveraged and decapitalized banks are morelikely to forgo long-run  productive investments to engage instead
in short-run, high-risk activities in order to recapitalize themselves.
A lack of strong prudential supervision ultimately led to excessiverisk concentration and capital flight.The market's ability to correct structural deficiencies through highinterest rates was undermined by the State guaranteeing bankdeposits and private sector external borrowing.  Moreover, the
author holds that institutional and other imperfection associated
with long-entrenched financial repression tend to linger on,preventing markets from adjusting rapidly to price-based creditallocation.The study also addresses real sector developments and the impact
of the international recession in 1981-85.S/C/W/26/Add.1
Page 77
I. Publication Suwandi, Titin (1995), Indonesian banking post-deregulation:
moral hazard and high real interest rates, Canberra (EconomicsDivision Working Papers,  Research School of Pacific and AsianStudies).
II. Sector Financial Services:  Banking
III. Policy Change Domestic deregulation  of the Indonesian banking sector since the
early 1980s.
IV. Rationale for Policy Reform Deregulation was aimed at reducing government intervention and
promoting market-based adjustment. Positive real interest rateswere expected to favour financial over non-financial savings,
leading to the deepening of financial markets and improving the
productivity of investment.  Controls in the pre-deregulation erahad led to negative real deposit and loan interest rates which, inturn, operated as a deterrent on savings and encouraged capitalflight.
 V. Results(a) Sector-specific- The number of private domestic and joint venture banks rose
dramatically after 1988, resulting in intense competition to attractdepositors and borrowers.
- State-owned banks could not maintain their dominance as privatebanks offered higher deposit interest rates. The assets of privatecommercial banks increased from 12% in 1982 to 42% of totalbank assets in 1994, while those of state-owned banks declinedfrom 72% to 40% over the same period.
- The share of joint-venture banks in total bank assets did notincrease significantly between 1982 and 1984, since theirexpansion into branches and other activities was still limited byregulation. These banks were not permitted to compete in the retailmarket as they were expected to capture too large a share.
- Between 1991 and 1993, bank expansion slowed down and manyborrowers defaulted as real interest rates increased strongly.
- By 1993, high real interest rates and a high proportion of non-performing loans plagued the banking system. Real interest ratesreportedly increased as a result of expected currency devaluationand inappropriate banking supervision.
(b) Economy-wide - Domestic savings increased with rising real deposit interest rates
during the period 1968-1988.
- The expansion of commercial banks resulted in financial
deepening, with the money supply (M2) to GDP ratio increasing
from 18% in December 1982 to 30% in December 1988 and 49%
in December 1993.
(c) Consumer Welfare No comment
VI. Additional Comments The study explores various costs and benefits of financial
deregulation in Indonesia.S/C/W/26/Add.1
Page 78
I. Publication Tandon, Rameshwar P. (1996), "Japanese Financial Deregulation
since 1984", UNCTAD Discussion Paper , No. 114, Geneva.
II. Sector Financial Services:  Banking
III. Policy Change Domestic Deregulation  and Liberalization of Japan's financial
system as part of an agreement with the United States in 1984.
- Capital flows were freed of most controls.
- Restrictions on the purchase of foreign bonds were relaxed. This
involved a removal of ceilings on foreign currency deposits held byresidents and deregulation of impact loans in foreign currency.
- Interest rates were liberalized.
- Financial businesses were opened to non-financial firms.
IV. Rationale for Policy Reform As Japan's role as a capital exporter grew, its regulated financial
system proved inadequate.  In the mid-1960s, a continuous current
account surplus contributed to increa sing foreign exchange reserves.
Liberalization was expected to increase demand for domesticcurrency by allowing foreign firms access to Japanese capitalmarkets.
V.  Results(a) Sector-specific - Deregulation enabled a large number of firms to issue bonds,
including convertible and warrant bonds.
-  Japan's share in international capital portfolio movementsincreased sharply. By the late 1980s, Japan's share in total capitaloutflows from industrial countries exceeded that of the UnitedStates and Europe combined.
- Japanese investors and commercial banks significantly increasedtheir foreign security holdings.
- Removal of restrictions on the issuing of bonds generated a largesecondary market in government bonds. This stimulated the growthof short-term money markets which are considered central to openmarket operations.
- The combination of liberalized interest rates and increasingcompetition lowered bank profitability as from 1989.  Despitestiffening competition, the share of small banks remained constantfrom 1980 to 1993.
- International financial transactions are in some areas less regulatedthan domestic transactions.  This has promoted significant growth inJapanese banks' overseas activities.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The study suggests that liberalization and, more specifically,
decreasing profitability in Japanese banks did not affect the
structure of the banking sector.S/C/W/26/Add.1
Page 79
I. Publication Velarde, Julio, and Rodriguez, Martha (1995), "Peru: Consolidating
Financial Reform" in M. Basch and C. Morales (eds.),  Expanding
Access to Financial Services in Latin America , Inter-American
Development Bank, Washington D.C.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation and external liberalization  of Peru's
financial sector in March 1991.
- Trade liberalization and partial deregulation of factor markets
went hand in hand with domestic financial deregulation and capitalaccount liberalization.  Interest rates were decontrolled.- The capital account of the balance of payments was completelyliberalized.  Restrictions on holding and selling foreign exchange
were removed.
- The Central Bank became autonomous and discontinued its
lending to the state-owned development bank.
- Regulatory and supervisory control was strengthened.
IV. Rationale for Policy Reform The Peruvian financial system was adversely affected by
macroeconomic instability, interest rate controls and high reserve
requirements.  Bank supervision and the regulatory and institutionalframework were inadequate. The channelling of funds todevelopment banks and the imposition of sectoral and regional loanportfolio quotas on private commercial banks distorted theallocation of funds.  The financial system reached a state of crisis
by July 1990.
V. Results
(a) Sector-specific - Financial deepening intensified in 1993.
- Rapid liquidity expansion based predominantly on an increase in
financial savings rather than monetary expansion.  While financialsavings grew from 3.6% of GDP in 1990 to 9.8% in 1993, moneysupply (M1) increased from 1.9% to 2.0%.
- The increase in financial savings was associated with the  removalof interest rate controls, authorization of foreign currency deposits,and increased confidence of economic agents.
- The rise in net financial income did not translate into improvedbank profitability as the composition of loan portfolios deteriorated.
 - In 1993, commercial banks increased their reserves for bad debts
which, in many cases, represented 10% of total loans.  Banks
reduced costs by closing offices and cutting staff.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional comments The author emphasises the influence of macroeconomic policies on
the performance of the financial sector and the effects of financialreform in Peru.S/C/W/26/Add.1
Page 80
I. Publication Velasco, Andres (1992), "Liberalization, Crisis, Intervention: The
Chilean Financial System, 1975-85", in V. Sundarajan and T.J.T.Balino (eds.), Banking Crises: Cases and Issues , Washington D.C.:
International Monetary Fund.
II. Sector Financial Services: Banking
III. Policy Change - Chile's Domestic Deregulation  in the early 1970s entailed
privatization of banks, removal of interest rate ceilings, relaxation
of regulations and greater integration into world capital markets.
- External liberalization in April 1980 included the complete lifting
of restrictions on international capital flows.
- Re-regulation was introduced under the Banking Law of 1986.
IV. Rationale for Policy Reform Regulatory reform was aimed at increasing competition and
promoting growth of the financial sector.
At macroeconomic level, financial liberalization was supposed tostimulate overall economic expansion, increase savings andimprove the quality of investment through market-based allocation.Financial reform was accompanied by stabilisation policies aimedat fighting hyperinflation during the early 1970s.
V. Results(a) Sector-specific - Real interest rates we re extraordinarily high, exceeding an annual
average of 76% between 1975 and 1982.  A substantial gap existed
between lending and deposit rates.
- Financial intermediation expanded as total financial assets rose
from 19.7% of GNP in 1975 to 48.1% in 1982.
- External debt grew rapidly, reflecting mainly foreign borrowingby the private sector.  During the period 1978 to 1981, capitalinflows exceeded current account de ficits thus resulting in a
build-up of international reserves. The accumulated debt of the
non-governmental sector went up from 5.0% to 61.7% of GDPbetween 1974 and 1982.
- In the absence of state supervision, banks increasingly made riskyloans.  By 1981, non-performing assets had increased dramaticallyas a percentage of bank capital and reserves.
- A sudden decline in capital inflows coupled with a slump in assetprices (a result of bankruptcies) and a reversal of optimisticexpectations, triggered the collapse of the financial system in 1982.
- By 1983, most major commercial banks and financial companieswere insolvent and taken over by the public sector.
(b) Economy-wide  - Average savings in the liberalization period from 1974 to 1983
did not change significantly relative to other periods.  (The interest
elasticity of savings is likely to be small in developing countries
like Chile).S/C/W/26/Add.1
Page 81
- Private sector investment increased sharply, but was offset by a
decrease in public investment;  average gross fixed investment as apercentage of GDP was only marginally higher than in the pre-liberalization period.
- In 1983, the economy plunged into recession due inter alia to a
collapse in export prices.  High interest rates following financial
deregulation further weakened the financial status of enterprisesand deepened the recession.
(c) Consumer Welfare No comment
VI. Additional Comments  The paper addresses the implications of financial liberalization in a
general equilibrium framework, discussing the possibility that
financial sector instability contributes to macroeconomicdisequilibria and vice versa.
The author attributes the Chilean  crisis primarily to excessive
growth and profit expectations and faulty assessment of economic
agents.  He considers Chile's financial sector reforms to be
inadequate as they did not address possible market imperfectionsand failed to encourage competition.S/C/W/26/Add.1
Page 82
I. Publication Velázquez, Efraín (1990), "El proceso de asignación de recursos
financieros en Venezuela", in Carlos Massad and Günter Held(eds.), Sistema financiero y asignación de recursos , Buenos
Aires.
II. Sector Financial Services:  Banking
III. Policy Change Between 1981 and 1984, interest rates were deregulated;  in 1985
guarantees for deposits were introduced.  Many private bankswere nationalized.
IV. Rationale for Policy Reform Fixed nominal interest rates, combined with growing inflation,
resulted in negative real interest rates and capital outflows by thebeginning of the 1980s.
V. Results(a) Sector-specific Venezuela's financial institutions remained strongly specialized;
there was only little financial deepening.
(b) Economy-wide - Real interest rates rose sharply between 1982 and 1984.
However, under the fixed exchange rate system, growing
inflation led to expectations of significant devaluation. Capitaloutflows thus continued.
- As the economy went through recession, interest rates werere-regulated.
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 83
I. Publication Vos, Rob (1997), "Financial Reform, Institutions and Macroeconomic
Adjustment: the Destabilizing Effects of  Financial Liberalization inthe Philippines, 1970 to 1992", in K.L. Gupta (ed.) Experiences with
Financial Liberalization , Massachusetts.
II. Sector Financial Services: Banking
III. Policy Change Domestic deregulation of the Philippine financial sector in 1973 and
the early 1980s. While credit rationing regulations remained unaltered,interest rate ceilings were removed in the early 1980s.
IV. Rationale for Policy Reform Institutional problems, weak competition and depressed rates of return
on assets in the financial market constrained credit availability and, byimplication, investment spending until the 1970s.  Many financialinstitutions relied on foreign borrowing in the 1970s to increase their
domestic lending capacity. The financial system consequently became
more vulnerable to external shocks and underwent three major crisessince 1970.
V. Results
(a) Sector-specific- Despite interest rate liberalization in the early 1980s, financial
savings remained stagnant.
- Indicators point to slow financial sector growth;  the level of
currency plus financial savings relative to GNP (M3/GNP) remainedrelatively stable since the 1980s.  The economic crisis of the 1980s as
well as a weak response of household savings to higher interest rates
undermined the mobilization of private savings.  Deregulation thusfailed to promote financial deepening. While interest-rate ceilingswere removed, the functioning of financial markets continued to sufferfrom inflexible pricing policies of banks and the persistence of credit-rationing practices.
- Bank concentration increased after deregulation with the five largest
banks owning 52% of the total assets of the commercial banking
system in 1991, compared to 30% in 1980.  Many banks merged inorder to cope with external shocks (rising world interest rates) and asignificant volume of non-performing loans.  The author holds thatderegulation-related increases in interest rates precipitated the increase
in concentration.
- Rising interest rates in combination with external shocks eventuallytriggered a financial crisis.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Financial liberalization failed to produce the envisaged results.  The
author pins the blame especially on an underdeveloped and fragilefinancial system, unstable macroeconomic conditions and weakbanking supervision.  He feels that the reforms might have exacerbatedweaknesses in the system, associating the increase in bank
concentration with a decrease in competition.  (On the other hand it
might be argued that regulatory inertia continued to hinder price-basedcredit allocation and de ter market entrants.)
The financial system was under considerable stress when reforms were
undertaken.  Most firms, which had accumulated large debts under low
real interest rates, were seriously affected by the removal ceilings.Moreover, cross-ownership links had increased the system'svulnerability to individual bank failures.S/C/W/26/Add.1
Page 84
I. Publication Williams, Marion V. (1996), Liberalising a regulated banking
system: the Caribbean case, Aldershot.
II. Sector Financial Services: Banking
III. Policy Change Easing of bank regulation  in Jamaica and Trinidad and Tobago
since 1985 was coupled with monetary liberalization and freeing of
the exchange rate.
Complete external liberalization of the financial system in Jamaica
in 1991 coincided with a significant reduction of interest ratecontrols and a complete removal of credit controls.
Barbados, by contrast, still retained strict regulation until the end of
1992;  high reserve requirements remained in place while interest
rates were partially liberalized and credit controls removed.
IV. Rationale for Policy Reform High reserve requirements, regulated credit and interest rate
controls had an adverse impact on the costs of financialintermediation.  Regulation contributed to decreasing the share ofbanks relative to non-banks in the financial market, leading to adecline in financial intermediation in all three countries.
V. Results(a) Sector-specific - Bank profitability increased during periods of less intense
regulation or increasing deregulation.
- Reserve requirements and bank solvency were found to be
negatively correlated in Jamaica and positively in Barbados,Trinidad and Tobago.
- Banks in countries without foreign competition were found to
have higher gross profit margins than banks in countries allowingfor foreign entry.
(b) Economy-wide Complete liberalization of the Jamaican markets in early 1991 was
accompanied by further devaluation and growing inflation.
(c) Consumer Welfare No comment
VI. Additional Comments The study concentrates more on the costs of regulation rather than
the benefits from deregulation for the Caribbean banking industry.
The author maintains that liberalization yields poorer results incountries with underdeveloped capital markets and non-existenteconomies of scale than in advanced large economies.S/C/W/26/Add.1
Page 85
I. Publication Zuleta, Luis Alberto (1990), "Estructura del proyecto de credito
para la inversión en Colombia", in Carlos Massad and GünterHeld (eds.), Sistema financiero y asignación de recursos , Buenos
Aires.
II. Sector Financial Services:  Banking
III. Policy Change - Up to the early 1980s, Colombia's credit policy was determined
by the Central Bank;  interest rates were regulated and creditswere allocated to strategic sectors. Prudential regulation and
supervision were almost absent.
- In 1982, prudential rules and supervision mechanisms were
adopted.  In 1983, interest rates in the private financial sectorwere deregulated.  Rates for public loans, although still regulated,started hovering around the market rates.
- From 1986, the Government increasingly issued bonds tofinance expenditure.  Reserve requirements continued to be usedas instruments of monetary policy.
IV. Rationale for Policy Reform Rising inflation in the 1970s hindered the development of a
market for long- and medium-term investment loans. Thefinancial sector was seen to be unable to promote domesticsavings and effectively direct them towards investment.
Excessive reliance of monetary policy on minimum reserverequirements also affected financial sector growth.
Lack of prudential regulation and inadequate prudentialsupervision resulted in a financial crisis in 1982.  Many bankswere temporarily nationalized.
V. Results(a) Sector-specific The volume of medium and long term loans started to grow
slightly after 1983.  However, depositors continued to prefershort-term accounts.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments Important new measures were taken after the publication of this
article.  Among others, at the beginning of the 1990s, a system ofmanaged currency floating was adopted;  the Central Bank wasestablished as an autonomous monetary authority;  banks were
privatized;  and foreign investment in the financial sector was
allowed.S/C/W/26/Add.1
Page 86
B. TELECOMMUNICATIONS
I. Publication Abdala, Manuel A. ( 1992), "Desregulación, privatización y
regulación del sector argentino de las telecomunicaciones",Estudios , No. 63 (Instituto de Estudios Económicos sobre la
realidad Argentina y Latinoamericana).
II. Sector Telecommunications
III. Policy Change - In 1990 ENTEL, the State-owned monopoly supplier, was
privatized.  In this context, the company was split into four units:
two operate regional networks;  one provides long-distanceservices;  and one specializes in competitive services such astelex and data transmission.
- A regulator, created in 1990, remained basically inactive until1992.  Regulatory requirements, including quality-relatedprovisions and price structures, were included in the privatization
contracts. Compliance was a precondition for maintaining the
operators' respective monopoly status which was granted forseven years with a possible three-year extension.  The extensionwas made contingent on certain performance criteria.
- Exclusivity for mobile telephony was granted in exchange forsome price reductions which were renegotiated in 1992.
IV. Rationale for Policy Reform Hyperinflation and deep recession in 1989 inspired substantial
public sector reforms.  ENTEL was chosen as a pilotprivatization project.
V. Results(a) Sector-specific- Immediately after privatization, average telecommunication
tariffs increased by over 96%.
- Labour productivity was extremely low before privatization.There were less than 78 lines per worker in service in 1990 ascompared to 250 lines in the U.S., 172 in France and 102 in GreatBritain.  After privatization, total employment was reduced by11.9% and the working week increased from 35 to 40 hours as in
the rest of the economy.
- Sub-suppliers changed.  While ENTEL was previously
committed to a buy-national policy, it switched to commercialcriteria.
(b) Economy-wide No comment
(c) Consumer Welfare Privatization revealed a tension between the Government's fiscal
interest in high tariffs (and thus in high transfers from the
monopoly operators) and user interests. The author feels that thefiscal objective prevailed;  the negotiated prices proved verycontroversial in Argentina. While praising the efficiency effectsof privatization, he stresses the need for more active regulatorysupervision.S/C/W/26/Add.1
Page 87
I. Publication Cave, Martin (1995), "Development of the UK telecommunications
industry through privatization and deregulation", Discussion PaperNo. 60, Economic Research Institute, Economic Planning Agency,Tokyo.
II. Sector Telecommunications
III. Policy Change Privatisation  of the telecommunications industry in the
United Kingdom in the early 1980s. The regulatory regimedistinguished between network operation and service provision.Network operation was restricted to a duopoly while competitionamongst service providers was encouraged.
- In 1984, the British government sold half of BritishTelecommunication's (BT) shares as part of its privatisation policy.By 1993, it had sold its remaining stake in BT.
- Between 1983 and 1991, the UK telecommunications industry wasrestricted to a duopoly, comprising BT and Mercury.  After 1991,most barriers to entry the domestic market were removed.
- Licences were issued to several mobile service providers through the1980s.  By 1995, 62 licences had been granted to telecommunicationsenterprises operating in the domestic market.  In internationaltelephony, however, the existing duopoly of international operatorswas maintained.
- Price control was tightened with the introduction of "price capregulations" since 1984.
IV. Rationale for Policy Reform
No comment
V. Results(a) Sector-specific - Despite the rapid increase in the number of telephone lines provided
by cable operators, BT remained dominant in the market as a whole,
accounting for 97% of exchange lines in 1994 and 87% of callrevenues.
- Over the period 1989 to 1994, BT's total factor productivity grew atan annual rate of 7.2%.
- After privatisation, BT doubled its investment level and maintaineda significant rate of return on capital.
- The weighted average real cost of all services provided by BTdeclined by about 40%.
- BT faced substantial competition in international as against local
markets.  Charges for international calls declined more than those for
local calls.
(b) Economy-wide No comment
(c) Consumer Welfare - Both BT and Mercury improved their quality of service, reflected in
a reduction of local call failures and improvements in fault repairservices.
- The tightening of price cap regulations together with the entry of
competitors significantly undercutting BT's prices led to large
consumer savings.S/C/W/26/Add.1
Page 88
- The main beneficiaries were businesses rather than households.
However, the pass-on effects of lower input prices also benefited finalconsumers.
VI. Additional Comments The author cautions against attributing all price and quality changes to
privatisation or increased comp etition. Since the early 1980s, the
telecommunication sector has also benefited significantly fromtechnological developments associated with digitalization and theintroduction of fibre optics.
The study argues that price cap regulations, accompanied byincreased competition, can help to reduce prices, align them more
closely with actual cost, and enhance productivity.S/C/W/26/Add.1
Page 89
I. Publication Imai, Hiroyuki (1994), "Assessing the gains from deregulation in
Japan's international telecommunications industry", Journal O f
Asian Economics , No.3.
II. Sector Telecommunications
III. Policy Change - Opening of the Japanese telecommunications market to private
competition.- Privatisation of Nippon Telegraph and Telephone Public
Corporation (NTT), a monopoly producer of domestic
telecommunication services.- Termination of Kokusai Denshin Denwa's (KDD) monopoly oninternational telecommunications services.
IV. Rationale for Policy Reform Reduction of Japan's large budget deficits in the aftermath of the
1973 oil embargo through the expansion of private businesses.  The
positive budgetary impact of privatisation led the government toreview the effects of regulation and the role of government-ownedcorporations.
V. Results(a) Sector-specific Short-run implications :
- In order to defend its market share, KDD intensified cost
reduction efforts and launched a se ries of sharp rate reductions.
KDD's profitability declined.
Long-run implications :
- Deregulation brought about a rapid rise in total factor productivity
and a corresponding 22.2% fall in KDD's unit cost over the period
from 1985 to 1992.  The average call rate in the market declinedproportionally to KDD's rate owing to the company's marketdominance.
- Entry of two new carriers in 1989 whose combined share in the
international telephone market reached 29% by 1992.
- The directional rate disparity between the United States and Japannarrowed substantially by the end of 1993, with a three-minute call
from the U.S. through ATT costing ¥613 compared to ¥670 yenthrough KDD.
- As a result of significant rate reductions, the volume of
international calls increased rapidly. The annual growth rate of
Japan's international telecommunications industry is estimated at27.6% for the 1984-1992 period.
(b) Economy-wide No comment
(c) Consumer Welfare - The efficiency gains reflected in the fall in KDD's unit costs led to
lower rates for international phone calls. KDD's standard 3 minute
call rates to the U.S., for instance, fell from ¥1,680 in 1 985 to
¥670 at the end of 1993.
- The corresponding consumer gains amounted to 25.6% of totalinternational telephone call revenues in 1992.
VI. Additional Comments The paper highlights the efficiency gains and welfare effects
associated with enhanced competition in the telecom sector.  It does
not address the impact, if any, on related sectors or on the budget
whose imbalance provided the initial incentive to deregulate.S/C/W/26/Add.1
Page 90
I. Publication Majumdar, Sumit K. (1992), "Performance in the US
telecommunications services industry: an analysis of the impact ofderegulation", Telecommunications Policy, No. 4.
II. Sector Telecommunications
III. Policy Change Domestic deregulation  in the U.S. telecommunications sector
during the period 1984-87.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - Average profitability of carriers rose in 1984 relative to 1981 and
then fell by 1987. The profitability decline reflected the increase incompetition.
- Productivity of firms increased constantly throughout the period
1981 to 1987.
-  Competitive pressures from new entrants into the industry
induced incumbent firms to reduce their prices between 1984and 1987.
(b)  Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The study provides an overview of the impact of deregulation on
various performance indicators of major U.S. carriers.S/C/W/26/Add.1
Page 91
C.  AIR TRANSPORT
I. Publication Baltagi, Badi H.;  Griffin, James M. and Rich, Daniel P. (1995),
"Airline Deregulation: The Cost Pieces of the Puzzle",International Economic Review , Vol. 36, No.1.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades of
Civil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform An increase in fuel  costs and a decrease in load factors (revenue
passenger miles divided by available seat miles) resulted in asignificant rise in airfares in the mid-1970s.
V. Results(a) Sector-specific - Average load factors rose from 56% (1975) to 62% (1992).
- Deregulation affected airline ticket prices in the following ways:
(i) Direct reductions from increased competition;  (ii) indirect
reductions from lower average costs;  and (iii) price pressure due tothe elimination of local service subsidies.  In sum, airfares underderegulation were estimated to have decreased by 18%.
- Lower airfares led to a significant increase in aggregate output.On the other hand, airlines were free after deregulation to increasethe frequency of flights between city-pair markets. The resultingincrease in traffic enabled firms to significantly reduce costs.
- Improvements in load factors and more efficient route structuresdue to hubbing further helped to reduce costs.Another source of cost-savings was the fall in average real wagesdue to absence of unionisation in new companies.  Total cost-savings attributable to deregulatio n are estimated at 9.3% for trunk
airlines and 19.9% for non-trunk airlines.
-  Over the 1971-86 period, fuel-efficient aircraft were put into
service.  Output growth and more efficient route structures in thepost-deregulation period allowed for the use of wide-bodiedaircraft.
- The rate of pure technical change in the airline industry isestimated to have declined from 4.6% to 3.4% annually afterderegulation. This has been attributed to slower introduction ofmore fuel efficient aircraft and slower relative improvements inload factors.
(b) Economy-wide No comment
(c) Consumer Welfare Airfares fell significantly after deregulation.
VI. Additional Comments The paper analyses the factors supposed to have led to significant
cost-reductions in the wake of deregulation.S/C/W/26/Add.1
Page 92
I. Publication Borenstein, Severin (1992), "The evolution of U.S. airline
competition", The Journal of Economic Perspectives , Volume 6,
No.2.
II. Sector Transport: Aviation
III. Policy Change Domestic Deregulation
- The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform Deregulation wa s expected to improve consumer welfare.
V. Results
(a) Sector-specific - New entry resulted in substantial price reductions on most routes.
- Airline profits increased significantly  in 1978 but declined rapidly
after the oil-shock.
- Due to recession, entry of new airlines came to a near halt by
1983.  New entrants either merged with major carriers or ceased
operation.
- Business concentration increased  between 1982 and 1990,
implying a decrease in competition, at the national level.  Hub andspoke operations expanded.
- Competition at the route level, however, increased substantially
between 1984 and 1987.
- Hub operations enhanced the efficiency of airline operations but
exacerbated congestion at major airports.
(b) Economy-wide No comment
(c) Consumer Welfare The hub and spoke system resulted in the following benefits:
- Decrease in the proportion of passengers who needed to changeairlines or planes during their trip;
- greater choice of departure times for most travels  between non-
hub airports;  and
- increased use of marketing strategies such as frequent flyer
programmes and special discounts.
VI. Additional Comments The study deals with a range of possible policy responses to
declining competition in the airline industry.  The author expressesconcern about the implications of  anti-competitive marketingdevices on the industry. Opening markets to foreign competition,
discouraging marketing strategies like frequent-flyer programmes
and requiring airlines to pay flat and equal commission rates to alltravel agents are among the measures considered to enhancecompetition.S/C/W/26/Add.1
Page 93
I. Publication Bowen, John T. and Leinbach, Thomas R. (1996), "Development
and liberalization: the airline industry in ASEAN", in G.C.Hufbauer and C. Findlay (eds.), Flying High: Liberalizing Civil
Aviation in the Asia Pacific , Institute for International Economics,
Washington  D.C.
II. Sector Transport: Aviation
III. Policy Change Policy Reform in ASEAN countries since the mid-1980s.
- All ASEAN countries partially privatised their state-owned flag
carriers. Although four major South-East Asian carriers (Thai
Airways International, Singapore Airlines, Malaysian Airlines andPhilippine Airlines) were privatised, the State retained a substantialequity share.  Governments continued to control domestic fares.
IV. Rationale for Policy Reform An efficient domestic and international transport network was
considered a prerequisite for export growth in South-East Asia.
Export-orientated industrialisation policies generated a need for
strong and efficient air links to foreign markets.Deregulation and privatisation we re also expected to enable
domestic carriers to compete successfully on a global scale.
V. Results(a) Sector-specific The increase in competit ion resulting from the entry of foreign
carriers helped to enhance the efficiency of flag carriers and otherdomestic carriers.
(b) Economy-wide The author suggests that denser transport networks encouraged
foreign investment in Asian countries. New aviation links promotedtrade and commercial ties.
(c) Consumer Welfare Movement of goods and people became faster and cheaper. A
larger number of flights became available to a wider range of
destinations.S/C/W/26/Add.1
Page 94
I. Publication Button, Kenneth J. (1996), "Aviation Deregulation in the European
Union: Do Actors Learn in the Regulation Game?", Contemporary
Economic Policy , No.1.
II. Sector Transport: Aviation
III. Policy Change - Domestic reforms  increased flexibility in allocating licences and
setting fares and, as in the UK, allowed for the privatisation ofstate-owned companies.
- Liberalization of bilateral agreements,  although not widespread,
encouraged new entries and requ ired incumbents to adjust.
- "Open Skies" agreements were concluded between individual EU
Member States and the United States.
- EU Aviation Policy:   Since January 1993, any EU airline has been
able to fly between Member States without restriction and withinother Member States subject to some controls on fares andcapacity.  From 1997, full cabotage is permitted and fares areunregulated except in a few pre-defined cases.
IV. Results(a) Sector-specific According to the author , the nature of the EU market - with
diverging national policy interests, airport capacity limitations, airtraffic constraints and a legacy of established routes and networks -
suggests that incumbents will make entry extremely difficult.  The
resulting structure is likely to resemble an oligopoly.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
V. Additional Comments Policy changes in the EU focused on liberalization rather than on
U.S.-type deregulation. The paper discusses how conditions in the
EU differ from the United States implying that the U.S. lesson can
have only limited relevance.S/C/W/26/Add.1
Page 95
I. Publication Button, Kenneth J. (1993), "International interdependencies
between the deregulation of domestic service industries: a casestudy of aviation in North America", The Service Industries
Journal , No. 3.
II. Sector Transport: Aviation
III. Policy Change United States:  Domestic deregulation
- The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
An "Open Skies"  policy involved more liberal provisions in
international bilateral agreements on prices and capacity.
Canada:  Domestic deregulation
Regulations were relaxed with the passage of the 'New CanadianAir Policy' of 1984;domestic deregulation was based on the 'National TransportationAct' of 1987.
Agreements with the U.S. enhanced trans-border competition.
IV. Rationale for Policy Reform Empirical studies illustrated the imperfections implicit in the
regulatory system.  The efficiency gains ensuing from theliberalization of several U.S. utilities in the early 1970s and of theU.S. trucking industry in 1968 testified to the benefits of reform.
The author maintains that Canada's dependence on the U.S. market,which offered trans-continental passengers the benefits of frequentflights and cheaper fares, was an important determinant of Canada'sderegulation policy.
V. Results(a) Sector-specificUnited States
- A firmly established pattern of hub-and-spoke operations was
dominated by a few large suppliers. Hubbing enabled airlines toincrease load factors, lower co sts and thereby decrease fares.
- Between 1978 and 1988, the number of passengers increased by
88%, scheduled revenue passenger miles by almost 62% andavailable seat miles by nearly 65% over 1976.
-  In order to deter new entrants in the industry, dominant airlinesinvested heavily in Computer Reservation Systems (CRS), whichprovided travel agents with information on fares and seatavailability and enabled direct booking.
- Both the hub-and-spoke system and CRS conferred strategicadvantages on larger firms and, th us, helped to increase the level of
business concentration in the industry.
Canada
- Deregulation resulted in an increase in competition.- The New Canadian Air Policy of 1984 led to several mergers andacquisitions and, eventually, to a duopoly in 1989 (Air Canada and
CAIL).
(b) Economy-wide No commentS/C/W/26/Add.1
Page 96
(c) Consumer Welfare - A decline in real fares per passenger mile and a significant
increase in the availability of discounted tickets in both Canada andthe U.S.
- The hub-and-spoke system increased the range of routing options
as well as the choice of airlines.
- The reforms were not reported to have led to lower safety levels.
VI.  Additional Comments The study argues that the post-deregulation increase in
concentration in the U.S. aviation industry did not offer dominant
airlines monopolistic pricing oppor tunities owing to their control
over hubs.  Competition between hubs effectively operated as aconstraint.S/C/W/26/Add.1
Page 97
I. Publication Card, David E. (1996), Deregulation and labour earnings in the
airline industry, Working Paper Series, National Bureau ofEconomic Research, Cambridge, MA.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform Previous regulation in the U.S. airline industry is claimed to have
led to rent-seeking and operating inefficiency.Deregulation was, in principle, expected to shift cost functions
downward and result in increased output, lower retail prices andmore efficient resource allocation.
V. Results
(a) Sector-specific - The number of U.S. airline firms tripled as a result of deregulation.
However, open competition coincided with the oil-shock and theensuing surge in energy prices. By 1985, several airline firms hadceased operation.
- Wages declined in the early 1980s owing to the simultaneousimpact of competition and recession. Some firms negotiated wage
cuts with unionised workers.  The post-deregulation decline in
wages is attributed to the elimination of a regulatory rent premium.Overall, however, real wages declined by the same magnitude aseconomy-wide average wages from 1979 to 1994 .
- Airline workers, generally better educated, had less difficulties infinding new employment than other displaced workers.  However,
the wages of workers leaving the industry did not differ
significantly from those of newly employed workers.
- The creation of hub-and-spoke networks led to increasing returnsand a significant rise in business concentration.  While deregulation
had eliminated the primary sources of rents in the airline industry,
concentration created other rent elements.  Therefore, althoughwages in some firms declined to competitive levels, other firmswere able to pay far more.  Inter-firm wage dispersion increased.
- Airline industry employment expanded faster in the post-deregulation period.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper discusses how downward pressure on wages resulted not
only from recession, but from the need to cut costs due to an
increase in competition following deregulation.  Airline regulation
and a high rate of union representation in the industry had drivenwages far above "competitive" levels.  However, the study was notable to establish a clear relationship between deregulation and thegeneral wage level in the industry.S/C/W/26/Add.1
Page 98
I. Publication Dempsey, Paul S., and Goek, Andrew R. (1992), Airline
Deregulation and Laissez-Faire Mythology , Westport, Conn.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation  of the airline industry in the United States.
The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform Domestic deregulation was seen as crucial to enhancing
competition and efficiency in the industry.  It was based on theassumption that there were no significant economies of scale orother cost-related entry or exit barriers in the airline industry.
V. Results
(a) Sector-specific - The removal of entry regulation led to intense competition and
eventually to mergers among airlines.  Contrary to priorassumptions, this was indicative of the existence of economies ofsize (scope, scale and density) in the industry.
- According to the authors, deregulation led to cutthroat pricing.Dwindling profitability affected the industry's ability to reequip
aging fleets and maintain the quality of service.
- Over the first 11 years of deregulation, average net profits
amounted to 0.7% as compared with 4.5% for other US industries.
- More than 120 airlines entered the industry after deregulation, butmore than 200 went bankrupt over the following years.  After 50-
odd mergers and acquisitions, only 74 carriers remained in
business.  While the eight largest carriers had commanded 81% ofthe domestic market in 1978, their share increased to 95% by 1991.
- The hub-and-spoke method of operation was increasingly used asa result of competitive pressures. All but three hubs were
dominated by a single airline accounting for more than 60% of
take-offs, gates and passengers.
- The authors draw a direct link between the removal of entry andexit regulations and increasing traffic concentration on hub airports.
- Available evidence points to a decline in the overall number ofmonopoly markets since deregulation. However, the study holds
that, confounding pre-deregulation scenarios, unregulated
monopolies were able to charge excessively high prices and extractmonopoly profits.
(b) Economy-wide No comment
(c) Consumer Welfare - In 1988, average fares at 15 concentrated hub airports were found
to be 27% higher than those at 38 unconcentrated airports.  The
dominant carrier in almost all concentrated hub airports charged
higher fares than other carriers.S/C/W/26/Add.1
Page 99
- Service from and to small towns was often reduced to one airline.
- Average inflation-adjusted fares declined by 13% over the period
1978 to 1988. However, holding fuel prices constant, the real price
of air travel fell more rapidly in the period before deregulation thanafter deregulation.
- The increase in the number of flight departures meant morefrequent non-stop services from hubs.  However,hub airports experienced congestion, delays and an increase innoise pollution.
- As a result of hub-and-spoke connections, travellers had to spendmore time in both aircraft and airports.
- Air travel became more expensive for passengers beginning orending their journey at a hub as compared to those who connectedat a hub.
VI. Additional Comments The study concludes that the increase in business concentration in
the U.S. aviation industry reflected the existence of economies ofsize (scale, scope and density). The authors point out a strongcorrelation between the rise in business concentration and theincrease airfares, arguing that a more concentrated industry was
able to charge excessively high prices.
The study provides evidence of barriers to entry such as incumbentcarriers' dominance of hubs, computer reservation systems, andfrequent flyer programs that might have undermined market
contestability and contributed to the pricing power of incumbent
firms.S/C/W/26/Add.1
Page 100
I. Publication Edelman, Richard B., and Baker, H. Kent (1996), "The Impact of
Implementing the Airline Deregulation Act on Stock Returns",Journal of Economics and Finance, Volume 20, No. 1.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
- The U.S. Airline Deregulation Act of 1978 phased out fourdecades of Civil Aeronautics Board (CAB) control of the domesticair passenger industry by 1985.
- Airlines were free to determine their domestic routes and
schedules, beginning 31 December 1981, and were able to set theirdomestic fares and compete on prices from 1 January 1983.
IV. Rationale for Policy Reform The CAB's protection against price competition and the existing
barriers to entry created a monopolistic structure in the industry,leading to fares in excess of competitive levels and idle capacity.
V. Results
(a) Sector-specific - Price and entry competition prompted a decline in fares and an
increase in demand.
- Some airlines made financial losses after deregulation as they
relied on business expansion rather than on cutting costs and
raising productivity.  For instance, Continental, PanAm, Midway
and Trans World Airlines went bankrupt in the early 1990s.
- Airlines' stock returns fell as a result of adjustment and
restructuring costs.
(b) Economy-wide No comment
(c) Consumer Welfare Consumers benefitted from lower fares and a wider choice of
routes and flights.S/C/W/26/Add.1
Page 101
I. Publication Evans, William, and Kessides, Ioannis (1993), "Structure, Conduct
and Performance in the Deregulated Airline Industry", Southern
Economic Journal , No. 3.
II. Sector Transport: Aviation
III. Policy Change Domestic Deregulation
The U.S. Airline Deregulation Act of  1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.
IV. Results(a) Sector-specific - Hub-and-spoke operations and complex pricing schemes
proliferated;
- airports were dominated by single carriers;
- computer reservation systems increased in importance;
- loyalty-inducing devices such as frequent-flyer programs and
special commission arrangements with travel agents wereintroduced.
The hub-and-spoke system, resulting in increased load factors on
route segments, helped to reduce operating costs as costs per
passenger mile fell with increasing traffic density.  The system ledto business concentration at many hub airports.  Dominant carrierstended to receive significantly higher prices on trips beginning orending at the hub.  (Dominant firms account for over 50% of the
passenger boardings in 9 out of the top 25 airports).
The hub-and-spoke method and the merger wave of the 1980s hasgreatly expanded airline networks; however, mergers of airlines
with complementary air-routes have dampened competition.Besides, fares have been higher on routes serviced by carriers withextensive inter-route contacts.  Consumers were given  choice ofairlines at any given route.
(b) Economy-wide No comment
(c) Consumer Welfare Deregulation has enable d airlines to reduce operating cost, raise
load factors, increase the availability of discount tickets and expand
the number of flights without significantly affecting the quality of
service and safety.
V. Additional Comments The paper provides insights into unintended effects of airline
deregulation, indicating that most of the benefits have come atsome cost.S/C/W/26/Add.1
Page 102
I. Publication Formby, M. John P. et al.  (1990), "Costs under regulation and
deregulation: the case of US passenger airlines", The Economic
Record, No. 195.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades of
Civil Aeronautics Board (CAB) control of the domestic air
passenger industry.
IV. Rationale for Policy Reform Regulation is claimed to have led to excessive rent-seeking,
expense padding and X-inefficiency. Non-price competitionprompted firms to increase the cost of operation through higher
levels of service quality.  Deregulation was, in principle, expected
to shift cost functions downward and result in increased output,lower retail prices and more efficient resource allocation.
V. Results(a) Sector-specific
Short-run implications :
- Total costs increased by nearly 60% between 1976-77 and 1984-85 for reasons which were mostly unrelated to the airline industry
and deregulation. These included higher interest rates and large
increases in the prices of labour, fuel and equipment.
- Over the same period, significant price competition among
airlines led to a 60% rise in passenger output and a 10% rise in
freight.  Increases in output led to higher total costs.
Long-run implications:
- Changes in factor prices and factor productivity led to costdecreases for most airlines. While in the short run theproductivity-related cost reduction was 6.5%, it amounted to 13.5%in the long run.
(b) Economy-wide No comment
(c) Consumer Welfare No commentS/C/W/26/Add.1
Page 103
I. Publication Kennet, David M. (1993), "Did deregulation affect aircraft engine
maintenance? An empirical policy analysis", The Rand Journal o f
Economics, No. 4.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic air
passenger industry.
IV. Results
(a) Sector-specific - The number of engine hours between major workshop overhauls
increased significantly in the period following deregulation.  Thissuggests that airlines responded to competitive pressures by
optimizing scheduled service times.
Controlling for improvements via model upgrades in engines andsimilar factors, deregulation seems to have reduced the probabilityof engine checks and overhauls.
(b) Economy-wide No comment
(c) Consumer Welfare Aggregate safety did not decline following deregulation as there is
no evidence of reduced engine reliability as measured by in-flight
shutdowns.
V. Additional Comments During the regulated era, airlines competed in quality rather than
price.  Deregulation did not, however, significantly affect safety.S/C/W/26/Add.1
Page 104
I. Publication Nijkamp, Peter (1996), "Liberalization of Air Transport in Europe:
The Survival of the Fittest?" Schweizerische Zeitschrift für
Volkswirtschaft und Statistik , Vol. 132, No. 3.
II.  Sector Transport: Aviation
III. Policy Change United States:  Domestic deregulation
- The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic air
passenger industry.  Price and entry regulations were relaxed.
European Union:  Domestic Deregulation
Deregulation initiatives came into effect on 1 January 1988 as partof a gradual reform process to be completed by 1997.
IV. Rationale for Policy Reform European airline deregulation was aimed at creating a unified
market and, thus, promoting competition and growth. The sectorwas expected to improve its financial viability and stability.
V. Results(a) Sector-specificUnited States
- The post-deregulation rise in competition increased
efficiency and lowered costs, thus leading to reduced fares andhigher demand.
- The number of routes and the frequency of service increased.
However, this was accompanied by a rise in air and airport
congestion.
- The inability of many airlines to compete effectively led to an
oligopolistic industry structure.  The surviving firms were large andowed their dominance to the use of extensive hub-and-spoke
networks and marketing devices like frequent flyer programmes,
codesharing and computer reservation systems (CRS).
European Union
- Airfares did not decrease significantly.
- Several regulations with an adverse impact on efficiency and
costs remained in place.
(b) Economy-wide No comment
(c) Consumer Welfare In the United States, travellers could choose from a wider range of
price/quality combinations on most routes.
VI. Additional Comments The study analyses the determinants of post-deregulation business
concentration.  The role of marketing strategies such as CRS andfrequent flyer programmes as barriers to entry in the industry maywarrant further discussion.  The study concludes that it was easier
for the U.S. than the European Union to undertake regulatory
reform.S/C/W/26/Add.1
Page 105
I. Publication Obermann, Stefan (1992), Deregulierung und dynamischer
Wettbewerb - das Beispiel des US Luftverkehrsmarktes, List
Forum für Wirtschafts- und Finanzpolitik , No. 1.
II. Sector  Transport:  Aviation
III. Policy Change Progressive liberalization of prices, traffic routes and market entry
in the U.S. air transport sector.
IV. Rationale for Policy Reform The increasingly open business environment provided under the
1978 Airline Deregulation Act enabled the individual carriers tostrengthen their company profiles.  They were increasingly free touse strategic parameters - including product, process and
institutional innovation - to position themselves in a more
competitive market.
The study explores the relationship between competition and the
carriers' business performance against the backdrop of twoconflicting hypotheses:  while enhanced market contestability can
be expected gradually to narrow profit margins among participants,
the theory of dynamic competition  suggests that industrial diversity
and, therefore, profit dispersion might grow in a more openenvironment.
V. Results(a) Sector-specific The study finds that over the period 1970 to 1984, the dispersion in
profitability (return on turnover) among 16 larger U.S. carriersactually increased.  Enhanced market contestability thus did notapparently translate into greater uniformity of business behaviourand results.  The aggregate figures seem to mask significant
changes in the individual carriers' relative profitability and, thus,
their ranking over the research period.
(b) Economy-wide No comment
(c) Consumer Welfare Positive welfare implications resulting from both increased price
competition and wider choice.
VI. Additional Comments The study emphasises that the consumer benefits to be expected
from air transport deregulation are not limited to lower airfares, butinclude a widening range of competing price-quality combinationsand, thus, better market response to individual preferences.S/C/W/26/Add.1
Page 106
I. Publication Peoples, James H. (1991), "Airline deregulation and industry wage
levels", Eastern Economic Journal,  No. 1.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic airpassenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform In the 1970s, airline workers' wages exceeded the national average
owing to weak competition between carriers and high levels ofunion participation.  Deregulation was expected to reduce profitsand market shares of high-priced carriers, thus diminishing thepossibility of "excessive" labour costs being passed on to
consumers.
V. Results(a) Sector-specific - The entry of non-unionized competitors after deregulation led to a
decline in airfares. The average profit margin of major domesticcarriers fell from 15.23% in 1978 to 4.86% in 1982.
- Average airline wages after deregulation still exceeded thenational average wage. The author attributes this to the airline
industry's employment of generally qualified workers with higher
levels of education and better socio-economic conditions.Moreover, the industry continued to be highly concentrated afterderegulation, with a large share of organized labour.
- However, wage levels did not exceed wages in industries withsimilar labour and product market structures. The study points to
the absence of industry-wide labour contracts and the federal
governments' diminished tolerance towards strikes by air trafficcontrollers.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments This paper discusses how high levels of education and professional
qualification in a sector might prevent wages from falling relativeto the rest of the economy.S/C/W/26/Add.1
Page 107
I. Publication Phu, Son Hoa (1991), The effects of US airline deregulation on
public intercity passenger travel demand: an econometrics analysis,(Ph.D. dissertation), University of Oklahoma, Ann Arbor,Michigan.
II.  Sector Transport: Aviation
III. Policy Change Domestic deregulation  of the airline industry in the United States.
The U.S. Airline Deregulation Act of 1978 ended four decades of
Civil Aeronautics Board (CAB) control of the domestic air
passenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - Average deregulated airfares were found to be 34% lower than
regulated airfares.- Airfare reduction resulted in an increase in the average distance of
airline travel. The increase in travellers' purchasing power also led
to additional demand for bus and rail travel.
(b) Economy-wide No comment
(c) Consumer Welfare Significant savings resulting from the reduction in airfares.
VI. Additional Comments The study analyses the economic effects of airline deregulation on
public intercity travel demand.  No attention is paid to the price anddemand effects that might have resulted from a reduction in fuel
costs.
The author provides an overview of conflicting views on the effectsof deregulation on airfares.S/C/W/26/Add.1
Page 108
I. Publication Reynolds-Feighan, Aisling J. (1992), The Effects of Deregulation
on US Air Networks , Berlin.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades ofCivil Aeronautics Board (CAB) control of the domestic air
passenger industry.   Price and entry regulations were relaxed.
IV. Rationale for Policy Reform The U.S. airline in dustry was becoming increasingly inefficient as a
result of tight regulations and protection under the CAB.Deregulation was expected to make the industry more efficient,competitive and consumer-oriented.
V. Results(a) Sector-specific - Traffic levels increased dramatically after 1978; however, the
number of airlines in the national airway system declined.
- Dominant air carriers expanded their networks through internal
growth or mergers/take-overs.  The networks were built on a small
number of airline hubs.
- Empirical evidence suggests that airport and airline concentration
levels were high long before deregulation owing to the operation of
hub-and-spoke systems. Deregulation accelerated the process ofconcentration, but did not initiate it.
- Output and productivity grew rapidly during the period 1976-80
due to changes in operating charact eristics such as load factors,
average stage length and available capacity.
(b) Economy-wide No comment
(c) Consumer Welfare  Lower airfares after deregulation.
VI. Additional Comments The author considers the spatial restructuring of airline networks to
be an important outcome of deregulation.  He emphasizes the needfor further research on the impact of deregulation on air trafficpatterns.
The study includes a review of existing literature on airline
deregulation.S/C/W/26/Add.1
Page 109
I. Publication Reynolds-Feighan, Aisling J. (1997), The effect of US airline
deregulation on airport traffic patterns, Dublin (Centre forEconomic Research Working Paper Series).
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades of
Civil Aeronautics Board (CAB) control of the domestic air
passenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform No comment
V. Results(a) Sector-specific - While deregulation allowed airlines to determine their own routes,
rates and service frequency, there were no mechanisms definingaccess rights to small airports.
- The level of concentration in traffic patterns at larger airports,
which was already high, intensified further after deregulation.However, the hub-and-spoke system was not purely a post-deregulation phenomenon. The top 100 hubs accounted for 92% oftotal U.S. scheduled traffic in 1977 as compared to 96% in 1993.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments This study compares air tr affic concentration levels before and after
deregulation;  it does not seek to explain the empirical pattern.The proposal to develop a mechanism determining access to smallairports may warrant further policy attention.S/C/W/26/Add.1
Page 110
I. Publication Williams, George (1994), The Airline Industry and the Impact of
Deregulation, Aldershot.
II. Sector Transport: Aviation
III. Policy Change Domestic deregulation
The U.S. Airline Deregulation Act of 1978 ended four decades of
Civil Aeronautics Board (CAB) control of the domestic air
passenger industry.  Price and entry regulations were relaxed.
IV. Rationale for Policy Reform The U.S. airline in dustry was becoming increasingly inefficient as a
result of tight regulations and protection under the CAB.Deregulation was aimed at making the industry more efficient,competitive and consumer-oriented.  Small and medium-sized
carriers were expected to compete successfully and airfares to fall
due to improved operational efficiency.
V. Results(a) Sector-specific - Low-cost new entrants threatened the position of previously
protected airlines which suffer ed from high operating costs and
decentralised route systems.
 - Computer reservation system (CRS), previously a cost-saving
device to process flight reservation data, became an important
marketing tool after deregulation. Airlines paid travel agentscommissions and prohibited them from using other companies'reservation systems.
- Hub-and-spoke systems enabled the carriage of passengers with
different origins or destinations on the same flight. The systems
were in sharp contrast to the linear route structure typical of theperiod before deregulation;  it led to 5-10% higher load factors onroutes emerging from hubs.
- Hub-and-spoke systems also reduced the degree of
interdependence between airlines.  Airlines operating such systems
provided a level of service that other airlines were unable to match.
- The combined effects of hub-and-spoke systems and marketing
devices like CRS and frequent flier programmes contributed to
increasing business concentration in the airline industry. In 1988,for instance, 86% of industry operating profits accrued toAmerican, Delta, United and US Air, although they accounted foronly 51% of total available seat kilometres.
(b) Economy-wide No comment
(c) Consumer Welfare The deregulated aviation industry offered travellers a significantly
greater number of options in terms of carriers, routes and fares.
VI. Additional Comments The study includes a comparative overview of deregulation policies
in Europe, the United States, Canada and Australia.S/C/W/26/Add.1
Page 111
I. Publication Yarrow, George (1995), "Airline deregulation and privatization in
the uk", is On privatization and deregulation in the United
Kingdom , Tokyo (Discussion Papers No. 60, Economic Research
Institute, Economic Planning Agency).
II. Sector Transport: Aviation
III. Policy Change Deregulation of the airline industry in the United Kingdom in the
mid 1980s.- The major national carrier, British Airways (BA) went through afinancial restructuring programme with the objective of eventualprivatisation.  The carrier was fully privatised in 1987.
- The British government's "multi-airline policy" provided
assistance to new airlines in or der to encourage entry into the
industry.- Fare pricing was liberalized in 1993.
IV. Rationale for Policy Reform British and European aviation was dominated by state-owned
airlines operating in a highly protected market environment.In 1981, BA suffered a major financial crisis, which promptedfinancial management reform and restructuring. The reorganisationpaved the ground for privatization, which was expected to improve
BA's performance.
V. Results(a) Sector-specific - During the 1980s and the 1990s, the British and European airline
industry became significantly more competitive, induced by theentry of several private operators.
- Shortly after deregulation, the number of airlines operating on aparticular route increased. In the longer run, however, the number
of operating airlines fell again as unprofitable companies closed
down.  BA, which had controlled 60% of market share beforederegulation, regained an even larger share (84.4%) in the 1990safter several smaller competitors exited the market.  VirginAtlantic, commanding a 10.8% share in 1992, has become BA's
major domestic competitor.
- Since the mid-80s, BA's average revenue fell steadily in real
terms.
- The pressure to reduce costs after privatisation pushed BA'swages down to levels significantly below comparable European
airlines.
- Productivity fell significantly during the pre-privatisation
restructuring programme in the mid-1980s but accelerated again in
response to higher competitive pressures associated with
deregulation.S/C/W/26/Add.1
Page 112
- Between 1975 and 1985, real unit costs were declining at a rate of
0.4% per annum compared to an average decline of 4.4% between1985 and 1994.  The author ascribes the first phase of costreduction to restructuring and change in management of BA.Longer term cost reduction is attributed to output expansionthrough the realisation of economies of scale and the competitive
pressures associated with deregu lation, liberalization and changes
in international market conditions.
(b) Economy-wide No comment
(c) Consumer Welfare Airfares on domestic scheduled and European routes fell steadily
after deregulation.
VI. Additional Comments Financial restructuring and subsequent privatisation helped BA to
meet the challenges of deregulation and liberalization.Consequently, prices and unit costs fell significantly and the airline
was able to expand considerably.S/C/W/26/Add.1
Page 113
D. ROAD TRANSPORT
I. Publication Alexander, Donald L. (1992), "Motor carrier deregulation and
highway safety: an empirical analysis", Southern Economic
Journal, No.1
II. Sector Transport:  Road
III. Policy Change Domestic deregulation
The Motor Carrier Reform and Modernization Act (MCA) of 1980marked the end of rate and entry regulation in the U.S. interstatetrucking industry.  Deregulation prompted an influx of new firms.
IV. Rationale for Policy Reform Before deregulation, rate bureaus acted like cartels, setting shipping
rates at excessive levels.
V. Results
(a) Sector-specific - The number of truckers with legal operating authority increased
from 18,045 in 1980 to 36,948 in 1986.
- Deregulation yielded lower prices, increased output and helped to
improve resource allocation.
- Contrary to general expectations, fatality and injury rates werelower in 1982 and 1987 than in 1977, despite the increase in trucktraffic. The accident rate after deregulation, however, remainedunchanged.
(b) Economy-wide No comment
(c) Consumer Welfare No comment
VI. Additional Comments The paper attributes the reduction in fatalities, despite the increase
in traffic congestion, to firm behaviour. Possibly owing to the
decline in wages paid, firms had the financial resources to provide
drivers with additional safety equipment and training.S/C/W/26/Add.1
Page 114
I. Publication Lawton-Smith, Helen (1995), "Deregulation and privatization in the
UK freight, bus and coach industries", On privatization and
deregulation in the United Kingdom , Tokyo (Discussion Papers
No. 60, Economic Research Institute, Economic Planning Agency).
II. Sector  Transport: Road
III. Policy Change Privatization and deregulation of the freight (trucking) industry in
the United Kingdom since the late 1960s.
- The freight industry was subjected to both United Kingdom (UK)as well as European Union (EU) regulations.  The bus and coachtransport industry, operating primarily in the domestic market, wasnot as affected by EU regulations as the freight industry.
- Enforcement of the Treaty of Rome, which entitles individualsfrom any Member State to provide goods and services anywhere inthe European Union, provided the major impetus to deregulation ofinternational haulage in the EU.
- Barriers to entry to the freight industry were first lowered in 1968,when restrictions on the number of vehicles that could carry freightwere removed.
- Large scale privatization of the freight industry began in 1982with the privatisation of Britain's largest freight company, theNational Freight Corporation (NFC).
Privatisation and deregulation  of the coach and bus industry in the
United Kingdom in the mid-80s.
IV. Rationale for Policy Reform Deregulation was expected to promote efficiency through enhanced
competition.
V. Results(a) Sector-specific Freight Industry
- Stiffening competition in general haulage prompted manyoperators to specialise their services.
- A significant number of manufactures and retailers replaced their
in-house operations with distribution companies offering storage,
stock control and transport. Between 1979 and 1994, own accounttonne-kilometres fell by 2% while public haulage tonne-kilometresrose by 64%.  (Own account traffic consists of operators carryinggoods in connection with their own business).
- International road freight transport has grown rapidly since the
1960s.  From 1993 to 1994, freight moved by heavy goods vehicles
increased by 7%, reaching the high est annual rate ever recorded.
- Environmental costs of freight transport were estimated at
between £10 billion an d £18 billio n for 1994-95.S/C/W/26/Add.1
Page 115
Bus and Coach Industry :
- Over the period 1985-86 to 1993-94, total passenger trips in thederegulated areas fell by 27% owing largely to an increase in fares.In turn, higher fares resulted to some extent from removal ofprevious subsidies.
- Total bus kilometres increased by about 25% between 1985 and
1994, as minibus operations expanded substantially.
- As a result of increased labour productivity, real operating costsper bus-kilometre fell sharply.
(b) Economy-wide No comment
(c) Consumer Welfare - Consumers benefited from improved quality and higher frequency
of bus and coach services.
- The frequency increase in bus and coach services and the growthin freight traffic, however, contributed to increasing congestion andenvironmental pollution.
VI. Additional Comments The paper argues that although deregulation of road transport in the
UK enhanced the level of competition in the transport industry andimproved the quality of service, it has exacerbated some
environmental problems.S/C/W/26/Add.1
Page 117
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A. FINANCIAL SERVICES
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B. TELECOMMUNICATIONS
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*CAVE, Martin (1995), "Development of the UK te lecommunications industry through privatization
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C. TRANSPORT
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COLOMA, German, et al. (1994), La privatización de  Aerolineas Argentinas,  Santiago de Chile
(Comisión Economica para America Latina y el Caribe).
*DEMPSEY, Paul S., and GOEK, Andrew R. (1992), Airline deregulation and laissez-faire
mythology, Westport, Conn.
*EDELMAN, Richard B., BAKER, Nent A. (1996), "The impact of implementing the airline
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Page 123
*EVANS, William N., and KESSIDES, Ioannis (1993), "Structure, conduct, and performance in the
deregulated airline industry", Southern Economic Journal , No.3.
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services", Minnesota Journal of Global Trade , No. 2.
KEELER, Theodore E. (1991), "Airline deregulation and market performance:  the economic basis for
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*KENNET, David M. (1993), "Did deregulation affect aircraft engine maintenance? An empirical
policy analysis", The Rand Journal of Economics , No. 4.
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routes as a case study,  Berkeley.
MARIN, Pedro L. (1995), La desregulación del tr ansporte aéreo en Europa y sus efectos sobre la
estructura de mercado,  Regulación y competencia en la economía española, Madrid.
MARIN, Pedro L. (1995), The remains of regulation:  airlines' profits after liberalization, London
(Suntory-Toyota International Centre for Economics and Related Disciplines, London School ofEconomics).
MAROLLES, Olivier de, and LENOIR, Alexis (1993), La déréglementation du transport aérien en
Australie,  Paris.
MECHLING, George W. (1991), Deregulation and the capacity, productivity and technical efficiency
of equipment of former trunk airlines, Journal of Transport Economics and Policy , No. 1.
MEYER, John R. (1992), "From closed set to open set deregulation: an assessment of the US airline
industry", The Logistics and Transportation Review , No. 1.
MORRISON, Steven A. (1995), "The effects of airline deregulation in the United States, in On
Privatization and Deregulation in the United States , Tokyo ( Discussion Paper , Economic Research
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*NIJKAMP, Peter (1996), "Liberalization of air transport in Europe:  the survival of the fittest?",
Schweizerische Zeitschrift für Volkswirtschaft und Statistik , No. 3.
NORMAN, Victor D., and STRANDENES, Siri P. (199 4), "Deregulation of Scandinavian airlines:  a
case study of the Oslo-Stockholm route", in Empirical Studies of Strategic Trade Policy , Chicago.
*OBERMANN, Stefan (1992), "Deregulierung und dynamischer Wettbewerb, das Beispiel des US
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Page 124
OUM, Tae-hoon (1991), "Airline deregulation in Canada and its economic effects", Transportation
Journal , No. 4.
*PEOPLES, James H. (1991), "Airline de regulation and industry wage levels", Eastern Economic
Journal , No. 1.
*PHU, Son Hua. (1991), The effects of US airline deregulation on public intercity passenger travel
demand:  an econometrics analysis,  Oklahoma.
*REYNOLDS-FEIGHAN, Aisling J. (1992), The effects of deregulation on US Air Networks, Berlin.
*REYNOLDS-FEIGHAN, Aisling J. (1997), The impact of US airline deregulation on airport traffic
patterns, Dublin (Centre for Economic Research Working Paper Series).
SAMUELS, George E. (1990), "Airline deregulation:  its effects and the competitive environment",
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*WILLIAMS, George (1994), The airline industry and the impact of deregulation, Aldershot.
*YARROW, George K. (1995), Airline deregulation and privatization in the UK, in On privatization
and deregulation in the United Kingdom ,  Tokyo ( Discussion Papers No.60, Economic Research
Institute, Economic Planning Agency).
(b) Maritime Transport
BENNATHAN, Esra (1993), "Deregulation of sh ipping:  lessons from Chile",  in Regulatory Reform
in Transport , Washington D.C.
(c) Rail Transport
BARNEKOV, Christopher C., and KLEIT, A.N. (1990), "The efficiency effects of railroad
deregulation in the United States",  International Journal of Transport Economics , No. 1.
BURTON, Mark L. (1993), "Railroad deregulation, carrier behaviour, and shipper response: a
disaggregated analysis", Journal of Regulatory Economics , No. 4.
MacDONALD, James M. (1996), "Railroad deregulation:   pricing reforms, shipper responses, and the
effects on labor", Industrial & Labor Relations Review , No. 1.
WILSON, Wesley W. (1997), "Cost savings and productivity in the railroad industry", Journal of
Regulatory Economics , No. 1.
WILSON, Wesley W. (1994),"Market-specific effects of rail deregulation", The Journal of Industrial
Economics , No. 1.
(d) Road Transport
*ALEXANDER, Donald L. (1992), "Motor carrier deregulation and highway safety:  an empirical
analysis", Southern Economic Journal , No. 1.
ALLEN, Benjamin J. et al. (1993), "Intrastate trucking deregulation:  have both the negative and
positive impacts been overstated?",  Transportation Journal , No. 1 (American Society of
Transportation and Logistics).
CORSI, Thomas M. et al. (1992), "The impact of deregulation on LTL motor carriers:  size, structure,
and organization", Transportation Journal , No. 2.S/C/W/26/Add.1
Page 125
KLING, Robert W. (1990), "Deregulation and struct ural change in the LTL motor freight industry",
Transportation Journal , No. 3.
*LAWTON-SMITH, Helen (1995), "Deregulation and privatization in the UK freight, bus and coach
industries", in On privatization and deregulation in the United Kingdom , Tokyo ( Discussion Papers
No. 60, Economic Research Institute, Economic Planning Agency).
TRAYNOR, Thomas L., and McCARTHY, Patrick S. (1991), "Trucking deregulation and highway
safety:  the effect of the 1980 Motor Carrier Act", Journal of Regulatory Economics , No. 4.
YAMAUCHI, Hirotaka (1995), "Regulatory reform and changes in the Japanese trucking industry", in
On Privatization and Deregulation in Japan ,  Tokyo ( Discussion Paper , Economic Research Institute,
Economic Planning Agency).
D. PROFESSIONAL SERVICES
MURRAY, James (1996), "Liberalization and the consumer", in International Trade in Professional
Services , Paris.
__________