The previous chapter argued that there is a meaningful distinction to be drawn between financial liberalization, which means the removal of the panoply of restrictions on the financial sector that constitute financial repression, and financial reform, which combines liberalization with a more affirmative role of the government in the financial sector. We concluded that if this affirmative role is to contribute to a more efficient financial sector, then the government's policy interventions should be targeted specifically at the credit market imperfections that may impede the proper functioning of a liberalized financial system, and examined what some of those interventions might be in order to characterize the government's role in a fully reformed financial system.

The next step is to consider whether there is anything we can say about how the process of reforming the domestic financial system might be carried out. Though theory tells us that a well-functioning financial system can make an important contribution to fostering economic growth, the process of reforming the financial system may prove to be a difficult one. We have already seen that without the necessary institutional preconditions in place, financial liberalization can go wrong, and not only may the favorable growth outcomes expected from the process not be achieved, but the financial system may itself become a source of macroeconomic problems that undermine economic growth.