Financial systems and development

less demanding listing requirements or an ade-
quate network of business contacts-is essential so
that investments can be sold.
ing countries have been joint ventures between national
institutions (commercial as well as financial)
on one side and overseas leasing companies or
bank groups with experience in leasing on the
other.
CONTRACTUAL SAVINGS INSTITUTIONS. Contractual
savings institutions (life insurance companies,
VENTURE CAPITAL COMPANIES. Venture capital is occupational pension schemes, national provident
temporary start-up financing in the form of equity funds, and funded social security systems) have
capital or loans, with returns linked to profits and long-term and generally predictable liabilities.
with some measure of managerial control. Venture They are potentially good sources of finance for
capitalists expect losses on some ventures to be investment in corporate bonds and equities. In
greater than with traditional financing, but they high-income countries these institutions are the
invest because they think that greater than normal main suppliers of long-term finance. They provide
returns on others will more than make up for those savers with opportunities to diversify risk and
losses. Venture capital is ideally suited to projects with the benefits of investing in a portfolio selected
involving uncertainty, poor information, and lack by professional investors.
of collateral. It is therefore an alternative to finance A major impediment to the development of confrom
DFIs. It is clearly not suitable for every coun- tractual savings as a source of long-term corporate
try, however. It requires an entrepreneurial class finance has been the preemptive use of these funds
and an environment conducive to private sector by government. In many countries-Brazil, Coinitiatives.
A source of long-term investable re- lombia, Ecuador, India, Kenya, and Malaysia, for
sources is also necessary. And an active secondary instance-governments require contractual savmarket-either
a secondary stock exchange with ings institutions to invest a significant part of their
Box 7.7 Pension funds as a source of term finance
Compulsory pension funds have contributed signifi- In the first eight years of the new system, the total
cantly to the supply of long-term investment funds in value of assets grew to about 18 percent of GDP. Two-
Singapore and Chile. In Singapore the Central Provi- thirds of the funds are invested in government securident
Fund receives exceptionally high mandatory con- ties, one-quarter in mortgage bonds, and the rest in
tributions from employers and employees. Such contri- shares and other investments. Initially the earnings on
butions rose to 50 percent of salaries in 1984, before assets were very high (owing to high real interest
being temporarily reduced to 35 percent in 1986. Funds rates), but they are now about 4-5 percent in real
are mostly invested in government bonds, but employ- terms.
ees are now allowed to use their provident fund sav- The fraction of the portfolio invested in equity shares
ings to buy housing. At retirement, employees receive was negligible until 1985, because companies that had
either a lump-sum payment equivalent to their contri- a dominant shareholder did not qualify for pension
butions plus the accumulated return on the assets of fund investment. Only with the denationalization of a
the fund or an annuity determined by their life expec- number of large state enterprises (mainly utilities) and
tancy at retirement. The accumulated resources of the some further relaxation of prudential standards has it
provident fund are now equivalent to about 65 percent become possible for the pension managers to invest in
of GNP-a substantial amount of very long-term sav- corporate equities. Investment in corporate equities is
ings (with average maturity between twenty-five and likely to remain a small part of assets, not because of
thirty years), which will continue to grow.
regulation, but because securities are in short supply.
Chile restructured its pension system in 1981. Contri- Even after the denationalization program, the value of
butions are compulsory but are privately managed by all corporate stock is only about 25 percent of GNP; the
competitive firms. Employees can choose among plans value of pension assets will grow to about 100 percent
and switch at their discretion. Thus managers who per- of GNP as the system matures.
form better can expect to gain accounts. Compulsory The main issue for both funded and pay-as-you-go
contributions are set at 10 percent of salaries. Benefits social security systems is the rapid increase in life exbased
on life expectancy are determined at retirement; pectancy. This will require adjustments in the contributhe
minimum pension is 85 percent of the legal mini- tion rates, retirement benefits, or the retirement age.
mum wage, or about 40 percent of the average wage.
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