Commitment devices, opportunity windows, and institution building in Central Asia

(2006) report that in the early 1990s the CEEC have gradually liberalised their capital accounts
which has led to a number of reforms that strengthened the financial sector development in
these countries. The disciplining effect of financial openness stems from the fact that financial
openness not only improves access to international capital markets and foreign investment, but
it also comes at the risk of sudden stops and sudden reversals and thus, painful economic crises.
Therefore, it provides an incentive to improve regulatory framework in order to avoid recessions,
as well as reducing sovereign risk, borrowing costs abroad.

Figure 5 shows financial openness measures for Central Asian economies and the CEEC as
a benchmark from 1995 to 2004. Estimated stocks of total foreign assets plus liabilities as a
share of GDP provided by Lane and Milesi-Ferretti (2007) adjusted for exchange rate valuation
effects are used as a measure.

Figure 5 shows that the CEECs and Central Asian countries had similar levels around 1995
except for Turkmenistan and Uzbekistan. CEEC show a constant upward trend over the 1990s
and early 2000s similar to Kazakhstan and the Kyrgyz Republic. While all Central Asian
countries, except for Uzbekistan, overtook CEEC for a short period in the following years, only
Kazakhstan and the Kyrgyz Republic sustained high levels of financial openness similar to the
CEEC after the year 2001, which coincides with the changes documented in Figure 1.

While financial openness per se presumably does not provide an incentive to improve regu-

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