Financial systems and development

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Conclusions of the Report challenges to development. Moreover, change is certain to encounter political opposition: people This Report has tried to capture the essentials of benefiting from the present arrangements will rethe complex field of finance. In at least two re- sist reform. Others-although they stand to benefit spects it fails to do justice to the subject. First, too in the long run-will be hurt in the short run and often the developing countries have been dis- may not choose to make the sacrifices demanded cussed as though they were all alike, when in fact today for uncertain gains in the future. Change policies and experience vary widely among coun- may be most resisted in the very countries where it tries. Second, the Report has treated in a perfunc- is most necessary. tory way the human and political dimensions of Once reform is under way, the response will not the subject, both in discussing the origins of the be immediate; indeed, it may be painfully slow. financial problem and in offering prescriptions for After prolonged periods of inflation and many change. failed attempts to control it, the public will expect Unlike the problems of industry, those of finance inflation to continue and will behave accordingly. are not frozen in bricks and mortar, plant and ma- Entrepreneurs unpersuaded of the permanence of chinery. Financial claims, together with the all- new policy will be slow to change their ways. important "rules of the game," could be rewritten This Report has tried to specify the prerequisites overnight by government decree. But this is not to for building an efficient financial system capable of imply that reforming a country's financial system mobilizing and allocating resources on a voluntary can be accomplished quickly or easily. Time is basis. Such a system would continue to make misneeded for people to acquire the necessary skills in takes and waste resources. But it would probably accounting, management, and bank supervision. make fewer mistakes and waste fewer resources Training staff, building new institutions, and- than the interventionist approach followed in perhaps hardest of all-getting people to revise many developing countries today. their expectations have proved among the greatest 132
Bibliographical note This Report has drawn on a wide range of World Chapter 1 Bank reports and on numerous outside sources. World Bank sources include ongoing research, as Data in this chapter were drawn mainly from IMF, well as country economic, sector, and project OECD, and World Bank sources. Background work. The principal sources for each chapter are sources for the analysis of the international econoted below. These and other sources are then nomic environment include Fardoust 1989 and listed alphabetically by author or organization in work by the International Commodity Markets two groups: background papers commissioned for and International Economic Analysis and Prosthis Report and a selected bibliography. The back- pects divisions of the International Economics Deground papers, some of which will be available partment of the World Bank. The analysis of structhrough the Policy, Planning, and Research (PPR) tural adjustment relies on World Bank 1988a. Working Paper series, synthesize relevant litera- Shahrokh Fardoust was particularly helpful on the ture and Bank work. The views they express are section concerning prospects for growth. Ahmad not necessarily those of the World Bank or of this Jamshidi, Robert Lynn, and Christian Petersen cre- Report. ated the debt reduction scenarios. Box 1.1 was In addition to the principal sources listed, many drafted by Andre Sapir. Box 1.3 benefited from persons, both inside and outside the World Bank, comments by Oey Meesook. Desmond McCarthy helped with the Report. In particular, the core provided useful comments on the chapter. team wishes to thank Paul Beckerman, Gerard Caprio, Alan Gelb, and Patrick Honohan for their Chapter 2 extensive support. Others who provided notes or detailed comments include Robert Aliber, Jean The section "Finance and growth" draws particu- Baneth, Charles Blitzer, Robert Buckley, Anthony larly on the background papers by Balassa, Bhatt, Churchill, Mansoor Dailami, William Easterly, Gelb, Honohan and Atiyas, and Neal; the seminal Mark Gertler, Manuel Hinds, Thomas Hutcheson, classics McKinnon 1973 and Shaw 1973; the work Melanie Johnson, Deena Khatkhate, Johannes of Khatkhate (particularly 1972); and Fry 1988. In Linn, Linda Lowenstein, Carlos Massad, Diane addition, it benefited from Asian Development McNaughton, John Odling-Smee, Guy Pfeffer- Bank 1985, Fischer 1987, Haque 1988, Jung 1986, mann, Vincent Polizatto, Paul Popiel, Sarath Raja- Lanyi and Saracoglu 1983, Modigliani 1986, Rossi patirana, Bertrand Renaud, and Alain Soulard. 1988, Sundararajan 1987, and White 1988. The sec- 133
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Oxford University Press NEW YORK OX
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countries' financial institutions i
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4 Financial sector issues in develo
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7.1 Shares of medium- and long-term
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* Fractional reserve banking. The p
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NTB Nontariff barrier * Growth rate
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and grew even faster in 1988 than i
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etter loan recovery procedures, mor
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l~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~ ;:: ;
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The early years of the recovery wer
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Figure 1.4 Growth of export volume
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Figure 1.6 Saving and investment ra
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edly, in Argentina, Brazil, and Mex
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5~~~~ '~ ' S " ''t.*:'.: .:,0!3gft"
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Box 1.2 Debt concepts A variety of
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Table 1.1 Selected economic indicat
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Figure 1.8 Domestic and external li
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Box 1.3 Foreign equity investment E
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j Box 2.1 Life without money "Some
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other ways too. By imposing direct
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Box 2.2 Transaction costs and the s
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Box 2.3 Real interest rates and gro
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I Box 2.4 Swapping risk All economi
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Box 2.5 Deposit insurance Most high
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GOVERNMENT. As well as being regula
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and receivables, whereas developmen
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with the expansion of nonlocal trad
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over. Even so, bankers and industri
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Box 3.3 Financial swindles i Swindl
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Box 3.4 Financial underdevelopment
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Box 3.6 Universal banking One of th
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1960s. They speeded the internation
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4 Financial sector issues in develo
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Box 4.1 Directed credit in Turkey ,
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Box 4.2 Lending program for small e
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Box 4.4 The Botswana Development Co
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markets to finance their deficits,
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0~~~~~ = == X .. _- -- = -_ _ _ __
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Figure 4.3 Financial savings and th
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Box 4.8 Financial indexation in Bra
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Financial systems in distress Not s
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t !< 4> - !: e z u- >as uei- i.e_.S
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tem. They have succeeded in stemmin
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governments gave too little thought
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Box 5.4 The U.S. savings and loan c
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or take a step in the other directi
Page 96 and 97: have been even larger. The cost of
Page 98 and 99: ~Foundations offinancial systems If
Page 100 and 101: (an issue closely related to the as
Page 102 and 103: several centuries. The spread of su
Page 104 and 105: Bankruptcy and reorganization monit
Page 106 and 107: Box 6.5 Elements of a bank supervis
Page 108 and 109: they attempted to discipline bank m
Page 110 and 111: Developing financial systems What s
Page 112 and 113: Figure 7.1 Shares of medium- and lo
Page 114 and 115: Box 7.3 The financial history of a
Page 116 and 117: Box 7.4 Housing finance The formal
Page 118 and 119: Box 7.5 Bank modernization: Indones
Page 120 and 121: DEVELOPMENT FINANCE INSTITUTIONS. T
Page 122 and 123: esources in government securities o
Page 124 and 125: strides in recent years in establis
Page 126 and 127: Issues in informal finance Small-sc
Page 128 and 129: Box 8.2 Rotating savings and credit
Page 130 and 131: original amount to the renter by th
Page 132 and 133: cooperatives' managers because it a
Page 134 and 135: Box 8.4 The Badan Kredit Kecamatan:
Page 136 and 137: Toward more liberal and open financ
Page 138 and 139: a brief period firms faced rapid ch
Page 140 and 141: Box 9.2 Financial reform in Korea K
Page 142 and 143: In the next stage, financial reform
Page 144 and 145: industry, policy reforms and the re
Page 148 and 149: tion "Risks and costs of finance" d
Page 150 and 151: Montes-Negret, Fernando. "The Decli
Page 152 and 153: D.C.: International Monetary Fund a
Page 154 and 155: Harberger, Arnold C. 1985. "Lessons
Page 156 and 157: croenterprises: Programs or Markets
Page 158 and 159: Douglas Graham, and J. D. Von Pisch
Page 160 and 161: Table A.2 Population and GNP per ca
Page 162 and 163: Table A.5 GDP structure of producti
Page 164 and 165: Table A.8 Growth of export volume,
Page 166 and 167: Table A.10 Growth of long-term debt
Page 168 and 169: Table A.12 Composition of debt outs
Page 170 and 171: Contents Key 157 Introduction and m
Page 172 and 173: Introduction The World Development
Page 174 and 175: Throughout the World Development In
Page 176 and 177: Population _ 0-15 million The color
Page 178 and 179: Table 1. Basic indicators __ GNP pe
Page 180 and 181: Table 2. Growth of production______
Page 182 and 183: Table 3. Structure of production __
Page 184 and 185: Table 4. Agriculture and food Value
Page 186 and 187: Table 5. Commercial energy ~~Energy
Page 188 and 189: Table 6. Structure of manufacturing
Page 190 and 191: Table 7. Manufacturing earnings and
Page 192 and 193: Table 8. Growth of consumption and
Page 194 and 195: Table 9. Structure of demand Distri
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Table 10. Structure of consumption_
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Table 11. Central government expend
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Table 12. Central government curren
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Table 13. Money and interest rates
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Table 14. Growth of merchandise tra
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Table 15. Structure of merchandise
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Table 16. Structure of merchandise
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Table 17. OECD imports of manufactu
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Table 18. Balance of payments and r
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Table 19. Official development assi
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Table 20. Official development assi
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Table 21. Total external debt Long-
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Table 22. Flow of public and privat
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Table 23. Total external public and
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Table 24. External public debt and
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Table 25. Terms of external public
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Table 26. Population growth and pro
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Table 27. Demography and fertility
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Table 28. Health and nutrition popu
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Table 29. Education Percentage ofag
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Table 30. Income distribution and I
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Table 31. Urbanization Urban popula
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Table 32. Women in development_____
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Technical notes This twelfth editio
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Box A.1. Basic indicators for count
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Box A.2. Selected indicators for no
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from the Food and Agriculture Organ
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Exports of goods and nonfactor serv
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spectively. Since 1987 data are not
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The table reports the value of manu
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teed, and private nonguaranteed lon
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the Demographic and Health Surveys,
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also the one used within the global
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Bibliography Production and domesti
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Country classifications: World Deve
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I i
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