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any studies of Latin America over the last 15 years have noted the dual transitions under way as efforts to open up political systemshave largely occurred simultaneously with the promotion of economic liberalization policies. In some ways, however, the dual transition metaphor is misleading, because economic liberalization-or policies such as the reduction of tariffs and subsidies designed to open up the economy to greater competition-is often a separate process from financial sector liberalization. Financial liberalization is also primarily an economic process, but it involves a different subset of policies, such as removing government controls on exchange and interest rates, credit allocation, foreign investment, and capital movements, along with the privatization of state-owned financial service institutions. Reforming the financial system, furthermore, may represent an even more delicate endeavor for policymakers than reforming the general economy, because the financial system is the very core of the economy.Many countries have experienced financial sector instability to one degree or another during liberalization. Banking crises have occurred in several countries, including Mexico, where the December 1994 peso crisis led to a multiyear bailout of the banking sector costing over 21 percent of the gross domestic product (Christie 2000). Spillover from the so-called tequila crisis into other Latin American countries resulted in 171 This content downloaded from 195.78.109.192 on Fri, 9
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