Financial systems and development

other ways too. By imposing direct taxes on banks, in the next section, the amount saved in financial
by requiring banks to hold noninterest-bearing re- form affects the productivity of investment.
serves at the central bank, or by forcing banks to
invest in low-interest government bonds, they re- Finance and investment
duce the return on bank deposits. Historically,
governments raised finance by debasing commod- The financial system intermediates only part of a
ity money. Today they do the same by granting country's total investment, because firms and
themselves a monopoly in the creation of currency. households finance much of their investment di-
The rent earned from this monopoly is called sei- rectly out of their own saving. Only when investgniorage
(see Chapter 4). The more governments ment exceeds saving is it necessary to borrow, just
rely on it for revenue, the less savers are inclined as when saving exceeds investment it is necessary
to hold their wealth in financial form. As discussed to lend. The financial system's task is to move ex-
Figure 2.1 Average saving and investment rates and sectoral surpluses and deficits
for fourteen developing countries
(percentage of GNP)
El Saving
L3 Sector surplus
Households
El Investment ;
N
Sector a deficit st
o Self-financed investment pae)
Bus(ness
Govenment
l * ~~~~~~~~~~~Foreign .
^ 1j9 / - -\.92.0 j.
Financia sector 1 -
Note: Data are based on the sample of fourteen developing countries listed in Tabte 2.2.
Source: Honohan and Ativas (background paper).
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