Financial systems and development

They affect both economic activity and saving, as
well as exports and imports and the rate of investment.
Changes in taxes, subsidies, and quantita- Figure 1.5 Real commodity prices, 1970 to 1988
tive controls move resources between sectors. Ensuring
that adjustment achieves a balanced change
in spending and an appropriate sectoral realloca- Index (1979-81 = 100)
tion is critical for growth and development. The 150
domestic financial system plays an important role.
Nonfuel primary commodities'
It mobilizes domestic saving and directs it to the 125
most profitable investments.
Structural adjustment is complicated and slow. 100
It is especially difficult now-and all the more
necessary-because many developing countries 75 Metals and minerals /
are in dire financial straits. Countries need external
resources to offset the costs of adjustment. In the
1980s both the International Monetary Fund (IMF)
and the World Bank have helped finance economic
Petroleum
25
programs contributing to the adjustment process.
Fifty-nine countries received long-term structural
adjustment loans from the World Bank between 0
1980 and 1988. The programs consist of a series of 1970 1975 1980 1985 1988
operations, worked out with the borrower, that are
conducted within a medium-term macroeconomic Note: Real prices are annual average prices in dollars, deflated by
framework which is often supported by the IMF. the annual change in the manufacturing unit value (MUV) index,
a measure of the price of industrial country exports to developing
Many governments have made progress toward countries.
restructuring their economies, especially with re- a. Based on a basket of thirty-three commodities.
Successful adjusters, especially those in East Asia,
not only increased domestic saving and main-
tained high investment during the 1980s (see Fig-
ure 1.6) but also achieved export-led growth. In
the future their growth will need to depend less on
mestic financial system. external demand; domestic consumers should
In East Asia the newly industrialized economies reap some of the fruits of successful investment in
and several others have pursued sound macroeco- manufacturing. Domestic saving rates may therenomic
policies and maintained the competitive- fore return to their somewhat lower levels of the
ness of their exports. They have generally adapted 1970s.
well to the shocks of the 1970s and early 1980s. The Maintaining competitiveness requires support
populous economies of South Asia have also for the development of infrastructure and human
gard to trade reform and exchange rate policy. But
further reforms will be necessary. In some cases
industrial policies in support of earlier importsubstitution
strategies have maintained a protectionist
stance, despite trade reform. In other cases
inefficient financial systems continue to distort interest
rates. In many countries the failure of fiscal
reforms is undermining the adjustment achieved
so far and preventing further progress. Unsustainable
fiscal deficits create economic uncertainty,
contribute to high inflation, and subvert the do-
Challenges for successful adjusters
achieved good results. Their success has more to capital. In most countries such programs are govdo
with macroeconomic stability, prudent fiscal ernment funded. They call for long-term investand
external borrowing policies, and rural mod- ment strategies. Sound fiscal policy is a preernization
than with internationally competitive requisite.
trade policies. But economies are not prisoners of Moreover, as the successful adjusters become
their geography. Chile has pursued one of the more integrated with the international capital marmost
wide-ranging programs of economic liberali- kets, and as they compete with the next generation
zation, despite setbacks in the early 1980s, and of exporters of manufactured goods, the efficient
seems to be shedding the problems that beset allocation of domestic saving will become even
many of its neighbors. more important. A domestic financial system
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