Financial systems and development

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Figure 1.8 Domestic and external liabilities in selected developing countries, 1975, 1981, and 1987 (percentage of GNP) 12t0000 00 0:00;0C0 bCte d'vlire 20 Philippines 120 _ _ _ 0 00 120tt04;0 }0000 00:0i0 :;0$ 000: 000000 : X 0 100 100 80 60~~~~~~~~~~~~~~~6 1981 1987 17 India Thailand * Dome fsticliabilities o Long-term external debt 80 8 60 ~ 20_;_t iS0,,0 _ S f20f ;fi 00^-t-^f;- ; 1975 0 : t 00:1981 1987 1975 1981187 Note: Domestic liabilities are defined as total liquid liabilities of the financial system (International Financial Statistics, line 551), expressed in local currency. External debt is total long-term debt outstanding and disbursed, expressed in U.S. dollars at current exchange rates. Source: IMF and World Bank data. possibly even to an increase in negative net trans- Beyond the debt crisis fers, investment will drop. These considerations reinforce the view that continued and powerful All the evidence points to continued low capital structural adjustment by the debtor countries re- flows to the developing countries in the coming mains the most important ingredient in dealing decade. Official flows cannot fully offset the sharp with the debt problem. reduction in private flows. This underlines the 22
Table 1.3 Selected capital flows to developing countries, 1981 and 1987 (billions of dollars) Official development assistance Foreign Official direct Total grants investment Countrygroup 1981 1987 1981 1987 1981 1987 All developing countries 24.5 30.4 14.5 20.0 10.2 9.5 Sub-Saharan Africa 7.1 11.1 4.9 7.3 1.3 0.8 Middle-income East Asia 18 2.2 0.9 1.5 1.8 2.5 Low-income Asia 5.3 7.2 2.7 3.5 0.2 1.3 Europe, Middle East, and North Africa 8.2 6.3 5.1 5.0 1.3 0.8 Latin America and the Caribbean 2.1 3.6 0.9 2.7 5.6 4.1 Note: Data are based on the sample of 111 countries participating in the Debtor Reporting System. Data exclude certain countries with significant flows associated with offshore banking activities. Souirce: OECD and World Bank data. need for developing countries to adopt economic source of financing for economies at all levels of policies that increase domestic saving and ensure income (see Table 1.3). It frequently brings addithat resources are used as efficiently as possible. In tional benefits: access to new technologies or to this, the financial sector can play a crucial role. markets in which the foreign investing firm is ac- There is little doubt that over the past fifteen tive. It is also likely to bolster competition in doyears many developing countries have relied too mestic markets. During the 1980s foreign direct inmuch on external borrowing and too little on do- vestment in developing countries has been stable, mestic resources. In a sample of thirty-eight devel- averaging $10 billion to $15 billion a year (about oping countries for which data on the liabilities of 10-15 percent of total capital inflows). The relative the domestic financial system were available, ex- stability of the aggregate flow masks important ternal debt at the end of 1986 exceeded domestic changes in its size, sourcing, and composition in debt by more than 50 percent. For Latin America, different low- and middle-income countries. The external debt was on average two-and-a-half times direction of foreign direct investment is strongly greater than domestic bank liabilities. This shows influenced by political and economic stability and how much these countries have come to depend by policies toward trade and capital flows. Restricon external financing. Figure 1.8 illustrates the tions on profit repatriation and access to foreign range of experience. In countries with rapidly ex- exchange are especially important (see Box 1.3). panding external debt and shallow domestic finan- Foreign direct investment has to be serviced cial systems, such as C6te d'Ivoire and the Philip- through profit remittances, and it may be a more pines, external liabilities were two to five times expensive source of finance than borrowing. But as greater than domestic bank liabilities. India and long as it provides access to international markets, Thailand, in contrast, have relatively deep domes- better technology, and greater domestic competitic financial systems; they have consciously limited tion, it should be welcomed by most developing their recourse to external financing. economies. One lesson of the debt crisis is that commercial Other forms of risk sharing between developing bank lending at floating rates is not the ideal form countries and the international capital markets of financing for long-term development. It exposes have been very little developed to date. Some oil the borrower to interest rate and exchange rate bonds have been sold, and some deals have been fluctuations, and it does not tie the borrower's collateralized by commodity exports. The rapid fipayments to the outcome of the investment. Alter- nancial innovation of the past decade can be exnative forms of finance-foreign direct and portfo- pected to spread to developing countries in due lio investment and commodity bonds, for exam- course. ple-distribute risk between creditor and debtor. Foreign aid also remains an important source of Borrowing countries may also hedge their cur- external finance, particularly for low-income counrency exposures by adjusting the currency compo- tries in Sub-Saharan Africa. Some industrial counsition of reserves and borrowings to reflect the tries, notably Japan, have expanded their overseas likely impact of exchange rate and commodity development assistance in the 1980s. By early 1989 price changes on their future cash flows. Japan had extended nearly 90 percent of the $30 Foreign direct investment has been an important billion program announced in 1987 to "recycle" 23
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Page 4 and 5: Oxford University Press NEW YORK OX
Page 6 and 7: countries' financial institutions i
Page 8 and 9: 4 Financial sector issues in develo
Page 10 and 11: 7.1 Shares of medium- and long-term
Page 12 and 13: * Fractional reserve banking. The p
Page 14 and 15: NTB Nontariff barrier * Growth rate
Page 16 and 17: and grew even faster in 1988 than i
Page 18 and 19: etter loan recovery procedures, mor
Page 20 and 21: l~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~ ;:: ;
Page 22 and 23: The early years of the recovery wer
Page 24 and 25: Figure 1.4 Growth of export volume
Page 26 and 27: Figure 1.6 Saving and investment ra
Page 28 and 29: edly, in Argentina, Brazil, and Mex
Page 30 and 31: 5~~~~ '~ ' S " ''t.*:'.: .:,0!3gft"
Page 32 and 33: Box 1.2 Debt concepts A variety of
Page 34 and 35: Table 1.1 Selected economic indicat
Page 38 and 39: Box 1.3 Foreign equity investment E
Page 40 and 41: j Box 2.1 Life without money "Some
Page 42 and 43: other ways too. By imposing direct
Page 44 and 45: Box 2.2 Transaction costs and the s
Page 46 and 47: Box 2.3 Real interest rates and gro
Page 48 and 49: I Box 2.4 Swapping risk All economi
Page 50 and 51: Box 2.5 Deposit insurance Most high
Page 52 and 53: GOVERNMENT. As well as being regula
Page 54 and 55: and receivables, whereas developmen
Page 56 and 57: with the expansion of nonlocal trad
Page 58 and 59: over. Even so, bankers and industri
Page 60 and 61: Box 3.3 Financial swindles i Swindl
Page 62 and 63: Box 3.4 Financial underdevelopment
Page 64 and 65: Box 3.6 Universal banking One of th
Page 66 and 67: 1960s. They speeded the internation
Page 68 and 69: 4 Financial sector issues in develo
Page 70 and 71: Box 4.1 Directed credit in Turkey ,
Page 72 and 73: Box 4.2 Lending program for small e
Page 74 and 75: Box 4.4 The Botswana Development Co
Page 76 and 77: markets to finance their deficits,
Page 78 and 79: 0~~~~~ = == X .. _- -- = -_ _ _ __
Page 80 and 81: Figure 4.3 Financial savings and th
Page 82 and 83: Box 4.8 Financial indexation in Bra
Page 84 and 85: 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
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have been even larger. The cost of
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~Foundations offinancial systems If
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(an issue closely related to the as
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several centuries. The spread of su
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Bankruptcy and reorganization monit
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Box 6.5 Elements of a bank supervis
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they attempted to discipline bank m
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Developing financial systems What s
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Figure 7.1 Shares of medium- and lo
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Box 7.3 The financial history of a
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Box 7.4 Housing finance The formal
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Box 7.5 Bank modernization: Indones
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DEVELOPMENT FINANCE INSTITUTIONS. T
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esources in government securities o
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strides in recent years in establis
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Issues in informal finance Small-sc
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Box 8.2 Rotating savings and credit
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original amount to the renter by th
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cooperatives' managers because it a
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Box 8.4 The Badan Kredit Kecamatan:
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Toward more liberal and open financ
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a brief period firms faced rapid ch
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Box 9.2 Financial reform in Korea K
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In the next stage, financial reform
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industry, policy reforms and the re
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Conclusions of the Report challenge
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tion "Risks and costs of finance" d
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Montes-Negret, Fernando. "The Decli
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D.C.: International Monetary Fund a
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Harberger, Arnold C. 1985. "Lessons
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croenterprises: Programs or Markets
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Douglas Graham, and J. D. Von Pisch
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Table A.2 Population and GNP per ca
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Table A.5 GDP structure of producti
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Table A.8 Growth of export volume,
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Table A.10 Growth of long-term debt
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Table A.12 Composition of debt outs
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Contents Key 157 Introduction and m
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Introduction The World Development
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Throughout the World Development In
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Population _ 0-15 million The color
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Table 1. Basic indicators __ GNP pe
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Table 2. Growth of production______
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Table 3. Structure of production __
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Table 4. Agriculture and food Value
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Table 5. Commercial energy ~~Energy
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Table 6. Structure of manufacturing
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Table 7. Manufacturing earnings and
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Table 8. Growth of consumption and
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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
Page 262 and 263:
Bibliography Production and domesti
Page 264 and 265:
Country classifications: World Deve
Page 266:
I i
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