I Fiance Apicultural

6
tional finance service sector, enactmenit of istly laws, moderate reserve
requirements, ceilings on interest rates, relatively low deposit rates,
comparatively low lending rates, and credit allocation targets for socially
desirable projects and sectors.
The corresponding policy recommendation from the more recent
finance theories is for financial liberalization that relies on market
forces. It particularly advocates privatizatiotn of financial institutions
(including participation by moneylenders), lower reserve requirements,
removal of usury laws, elimination of ceilings ol interest rates and
indexing interest rates to inflation rates, raising deposit and lending
rates, and removal of credit quotas (McKinnon 1973; Shaw 1973). But
this advocacy has been quest ioned ()e Macedo 1988; Taylor 1979, 1981,
1983; Tobin 1965; and %'an Wijnbergen 1983a, 1983c, 1983d). The
following criticisms can be sumunarized from the literature that questions
liberalization, with examples fnom such countries as Argentina,
Brazil, Chile, the Republic of Korea, Turkey, and Uruguay.
First, such macro changes iliay lead to cost-putsh inflatiol-not only
in an arithmetic sense, but also through a process of decline in the
supply of loanable funds, due to loss of public lending institutions
combined with inadequtte rise of private institutiotns and inadequate
substitution of fitancial deposits for other forms of saving, with a
consequent restraint to growth in oitltt.
Second, the arguiltnetlt that the higher interest rates on little deposits
will cause higher itttdiIItn-tern growth and a lower inflation rate in the
short run is valid only if' the shift into tithi deposits comes out of
unproductive asset,; like cash and cotmmnodity stock. Bit, if this shift is
out of productive capital and loans in the iniformal market, then raising
deposit rates can have a tegat ive impact on growthi and lead to mote-rather
than less-inflation.
Third, proposed financial liberalization can also lead to hikes in
lending rates, which may ctonragc indiscrimitate lending without
proper assessment of the risk of repayinent of the credit projects. This
leads to an adverse effect ot lte viability and cfficicncy of financial
institutions, which thenllmay become bankrupt, as well as higher inflation
and lower saving atd output growth rates.
Fourth, market forces of the teoclassical cconomic world are notably
absent in financial markets. Tuis is because financial narkets by definition
are ittmperfect, dcaling as they do illttfttre transactions. Moreover, extetnalities
such as weather are particularly important i tinatncial markets.
If these criticisms ate extral)olated to rural financial markets and
made explicit to rural moderinization, a potential can be noted for rural
financial institutions (RFIs) to face risks and uncertainties that they resist
on their own. But, unless RFIs cxtctnd credit to encourage private
investment in modern fixed and working capital, agriculture's requiremtents
for new biological and other atutral resources for shifting its
production function upward cannttot be fulfilled. Consequently, the case
is built for deliberate promotion of financial itstitutions by tile government,
as well as administered intterest rates, ceilings on interest rates,
and credit quotas (De Macedo 1988; Taylor 1983; Tobin 1965; and van
Wijnbergen 1985).