Financial systems and development

Toward more liberal
and open financial systems
A number of countries, both developed and devel- and breadth of financial reform varied among
oping, have taken steps to liberalize their financial countries, and it is difficult to disentangle the efsystems
during the past decade. Interest rates fects of financial reform from those of other rehave
been liberalized in Argentina, Australia, forms that were taking place at the same time.
Chile, France, Ghana, Indonesia, Japan, the Re- Overall, though, it seems clear that financial liberpublic
of Korea, Malaysia, New Zealand, Nigeria, alization has helped to mobilize resources through
the Philippines, Sri Lanka, Turkey, the United the formal financial system and to improve the effi-
States, and Uruguay. In other countries, such as ciency with which they are used.
Thailand and Yugoslavia, interest ceilings have The task of reform is not straightforward. This
been managed more flexibly than before. Several chapter discusses the pitfalls to be avoided in the
countries,, such as Chile and Korea, privatized transition from a regulated financial sector to one
their commercial banks. Argentina, Chile, Paki- that is more market-oriented. It also discusses the
stan, and Turkey reduced their directed credit pro- issues raised by the integration of a country's figrams,
and interest rate subsidies were reduced or nancial system with international financial marabolished
in Korea and the Philippines.
kets.
Several factors prompted these shifts in policy.
During the past decade many developing coun- Recent experiences with financial reform
tries began to place greater emphasis on the private
sector and on market-determined pricing. In The pace and scope of reform have differed subhigher-income
countries, the inflationary shocks of stantially from country to country. Financial secthe
1970s and early 1980s underscored the limita- tors in most of the high-income countries were altions
of regulations on interest rates and credit. ready mature and market-based, and reform
Rapid advances in telecommunications and infor- focused on eliminating controls and thereby promation
processing have spurred the development moting competition. In some developing counof
new financial instruments and have promoted tries, however, financial systems were heavily regreater
financial integration both domestically and pressed before reform. Three countries in Latin
internationally. This has made it harder for govern- America-Argentina, Chile, and Uruguay-shifted
ments to control financial markets. within a few years from highly controlled to
The lessons of reform are obscured by difficulties largely uncontrolled finance. The Philippines and
in interpretation. The starting point and the pace Turkey also eliminated most of their interest rate
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