Financial systems and development

industry, policy reforms and the restructuring of External financial policy
industrial companies may also be necessary. Governments
should not simply recapitalize the insol- Financial reforms have been undertaken in intervent
financial institutions but should seize the op- national as well as domestic markets. Many highportunitv
to restructure the financial system in line income countries have eased their capital controls
with the country's future needs.
and cut restrictions on the entry of foreign inter-
Liberalization should not be limited to the re- mediaries. The result has been an increase in crossform
of the banking system but should seek to border financial flows and in foreign participation
develop a more broadly based financial system in domestic markets. Conversely, the development
that will include money and capital markets and of offshore markets has reinforced the trend tononbank
intermediaries. A balanced and competi- ward deregulation in domestic markets. Offshore
tive system of finance contributes to macroeco- financial markets have grown much more quickly
nomic stability by making the system more robust than domestic markets in recent years-a sign of
in the face of external and internal shocks. Active the pace at which finance is becoming an intesecurities
markets increase the supply of equity grated global industry. International bank lending
capital and long-term credit, which are vital to in- and net issues of international bonds grew two
dustrial investment. Experience in countries such and a half times faster than GNP in the highas
Malaysia and the Philippines suggests that the income countries during 1976-86.
liberalization of commercial banking will not add The growing importance of international finance
much by itself to the availability of long-term credit is also reflected in the rise in the share of foreign
and equity capital. In Korea, by contrast, the rapid loans, or of purchases of foreign securities, in
growth of the securities market and the develop- banks' transactions. For example, the ratio of exment
of new nonbank institutions substantially ternal assets to total assets for banks in the highimproved
the supply of long-term credit even income countries rose from 14 percent at the end of
though only limited liberalization of the banking 1975 to 19 percent at the end of 1985. External fisystem
took place.
nance went mainly to firms in high-income coun-
In many developing countries today the financial tries, but some of the growth represents commerinstitutions
in the most distress are part of the pub- cial bank lending to the now overly indebted
lic sector. Privatization of government banks is one developing countries, Similarly, the greater particiway
of improving their efficiency. But this course pation of foreign financial institutions has been evshould
be followed only after the quality of bank ident in most major markets. The number of forportfolios
and the regulatory framework have im- eign banking firms in the high-income countries
proved. In some countries thin capital markets has increased sharply. The ratio of the assets of
mean that selling bank shares to a large number of foreign banks to the assets of all banks increased in
individuals is hardly feasible. Hence privatization Belgium from 8 percent at the end of 1960 to 51
of public banks may simply shift the ownership of percent at the end of June 1985, in France from 7 to
the bank from the government to large industrial 18 percent, in the United Kingdom from 7 to 63
groups. That would increase economic concentra- percent, and in Luxembourg from 8 to 85 percent.
tion and undermine sound banking-as Chile dis- In the United States the ratio increased from 6 percovered
in the late 1970s. In small countries with cent at the end of 1976 to 12 percent in mid-1985.
few banks and weak regulation and supervision, Advances in telecommunications and data progreater
foreign participation in bank ownership cessing have driven these changes, which are
and management (as in Guinea of late) is well likely to prove irreversible. The greater internaworth
considering.
tional mobility of capital, the globalization of finan-
Where public institutions are not privatized, cial markets, and the development of new financial
other steps should be taken to improve efficiency. instruments have rendered a closed financial pol-
It is important that managers of public banks be icy costly and largely ineffective. To varying deprofessionals
with autonomy and accountability; grees, developing countries have participated in
clear procedures will be needed that keep govern- the trend toward more open and integrated finanment
interference in individual loan decisions, as- cial markets, partly in response to the growing ecoset
management, and personnel policy to a mini- nomic integration brought about by trade, tourmum.
It is equally important that public banks not ism, and migrant labor. Some countries have
be shielded from prudential regulation.
adopted foreign currency deposit schemes to in-
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