Financial systems and development

More documents

Recommendations

Info

Box 2.3 Real interest rates and growth Most developing countries have periodically held their indicated in the simple regression, the association is interest rates below market-clearing levels. These artifi- strong and appears to operate primarily through the I cially low interest rates have "repressed" their finan- effect of greater financial depth on the productivity of cial systems, shrinking financial assets in real terms investment. (Note, however, that countries with reespecially at times of high inflation. If financial depth pressed financial systems often suffer serious distorpromotes economic growth, artificially low real interest tions in other sectors of the economy as well. The rates may be an obstacle to development. strong relationship between real interest rates and A background study for this Report estimated the growth may therefore reflect the correlation between relationship between real interest rates and growth for macroeconomic imbalances and price distortions, parthe thirty-three developing countries with populations ticularly the negative association between high inflaof more than 1 million and acceptable data for the pe- tion rates and growth, as well as financial repression.) riod 1965-85 (the same countries that are grouped by Box figure 2.3 plots some of the country data used in interest rates in Table 2.3). When the data for these this study. The value of each country's average investcountries were averaged over each of two periods, ment rate (horizontal axis) is plotted against its average 1965-73 and 1974-85 (to take into account the marked growth rate (vertical axis) for the second period (1974- deterioration in growth of virtually all countries after 85). Although higher investment rates are associated the first oil shock), higher real rates of interest on short- on average with higher growth rates, the figure shows term deposits were indeed associated with faster that the relationship is loose. The differences between growth. In a simple regression where GY is the growth growth rates and investment rates reflect differences in rate, R is the real interest rate, and SHIFT is the dummy the productivity of investment. Any line drawn from for the second period the origin represents a given growth-investment ratio (the inverse of the incremental capital-output ratio); if (T-0.12 5)+(5 020R)t (-0.0 SHIFT4)0.4 all investments were equally productive, differences in growth rates would reflect differences in investment However, assessing the impact of interest rates on rates only, and all points would fall on a line that repreeconomic performance is not straightforward. Causa- sents the average productivity of investment. In the tion could run in either direction. To analyze the associ- figure that line-labeled "average productivity of ation between interest rates and growth, this study de- investment"-corresponds to the sample average. composed the relationship into a chain of relationships Thus the position of points with respect to the line more likely to run in one direction. The hypothesized reflects differences in the productivity of investment chain ran from interest rates to financial depth and to among the sample countries, with those above the line saving and from financial depth to the productivity of being more productive than the average and those beinvestment. low it less. The resulting estimates showed that higher real in- The blue squares depict countries with positive real terest rates (obtained by raising repressed rates toward interest rates, the white squares those with moderately modestly positive levels) are associated with increased negative rates, and the red squares those with strongly financial depth and with a modest increase in saving negative rates. Investments in all the countries with and investment. In the second link in the hypothesized positive real rates were more productive than average. chain, financial depth was strongly associated with Investments were generally less productive than avermore productive investment. When the estimates of age in the countries with strongly negative real rates, each link are put together, they suggest that, although four of which actually had negative growth rates over real interest rates have a smaller effect on growth than the period. greater in the countries with negative real interest investment was almost four times higher. Note, rates. Overall, output grew almost three times however, that mnany of the countries with positive faster, on average, in the countries with positive real interest rates also had more stable macroecoreal interest rates than in the countries with nomic policies and more open trading systems, strongly negative rates. Further analysis suggests which should also raise growth rates. that positive real interest rates helped growth mainly by improving the quality of investment and Risks and costs of finance not just by increasing the quantity of investment (see Box 2.3). Although the rate of investment was Lending is risky. Intermediaries must cover the only 17 percent higher in the countries with posi- costs of devising contracts that limit risk, of monitive real rates, the average productivity of their toring and enforcing those contracts, and of losses. 32
Box figure 2.3 Real interest rates, investment, productivity, and growth in thirty-three developing countries in 1974-85 U Positive real interest rates El Moderately negative real interest rates (0 to -5 percent) El Strongly negative real interest rates (less than - 5 percent) GDP growth rate (percent) 9 8 -__ -- _ exubcut-re qa 7_ L6 Pakistan El_______ '~~~~~~~~~~~~~E Sri Lanka Thailad Ma ysia Ecuado Singapore @ 4 ~~~~~~~~~~~~~~~~~~~~iTIkurhey L__l Tanzania b0 rocco Portugal Yugoslavia 1 3 Seriegal,, 0 ~~~~~~~~~~~~~~~~~~~~ Chile .- IFFl- __- 2 ~~~~~~Sierra Leone M tCoe d'lvoire Malawi r -~~~~~~~~~~~rga g u F- Venezuela Peru El Zambia o ArgentinaEl l -1 Average productivity of investment' Nigeria E E Zaire ] Ghana Jaaica 0 5 10 15 20 25 30 35 40 45 M Investment/GDP (percent) a. Line represents sample average. Source: Gelb (background paper). The extent of financial contracting depends on the caused by unexpected changes in prices-in interextent to which cultural, legal, and institutional ar- est or exchange rates, for example. Liquidity risk is rangements can reduce these costs. If they remain the risk of being unable to sell financial assets prohibitive, businesses will prefer to rely on self- quickly, except at a steep discount. In addition, finance. there is the risk that the default of one or a few large borrowers will endanger the whole financial Risks system. This is called systemic risk. Informational asymmetries are one source of Financial contracts involve credit risk, price risk, credit risk. Entrepreneurs have "inside" informaand liquidity risk. Credit risk is the danger that the tion about their own projects and creditworthiborrower will default. Price risk is the risk of loss ness. Lenders can reduce credit risk either by de- 33
Page 1: ~~~~/ , -. \-E:-: - :: 0 0 - PUB768
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 36 and 37: Figure 1.8 Domestic and external li
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 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
Page 86 and 87: t !< 4> - !: e z u- >as uei- i.e_.S
Page 88 and 89: tem. They have succeeded in stemmin
Page 90 and 91: governments gave too little thought
Page 92 and 93: Box 5.4 The U.S. savings and loan c
Page 94 and 95: 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 146 and 147:
Conclusions of the Report challenge
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
Page 196 and 197:
Table 10. Structure of consumption_
Page 198 and 199:
Table 11. Central government expend
Page 200 and 201:
Table 12. Central government curren
Page 202 and 203:
Table 13. Money and interest rates
Page 204 and 205:
Table 14. Growth of merchandise tra
Page 206 and 207:
Table 15. Structure of merchandise
Page 208 and 209:
Table 16. Structure of merchandise
Page 210 and 211:
Table 17. OECD imports of manufactu
Page 212 and 213:
Table 18. Balance of payments and r
Page 214 and 215:
Table 19. Official development assi
Page 216 and 217:
Table 20. Official development assi
Page 218 and 219:
Table 21. Total external debt Long-
Page 220 and 221:
Table 22. Flow of public and privat
Page 222 and 223:
Table 23. Total external public and
Page 224 and 225:
Table 24. External public debt and
Page 226 and 227:
Table 25. Terms of external public
Page 228 and 229:
Table 26. Population growth and pro
Page 230 and 231:
Table 27. Demography and fertility
Page 232 and 233:
Table 28. Health and nutrition popu
Page 234 and 235:
Table 29. Education Percentage ofag
Page 236 and 237:
Table 30. Income distribution and I
Page 238 and 239:
Table 31. Urbanization Urban popula
Page 240 and 241:
Table 32. Women in development_____
Page 242 and 243:
Technical notes This twelfth editio
Page 244 and 245:
Box A.1. Basic indicators for count
Page 246 and 247:
Box A.2. Selected indicators for no
Page 248 and 249:
from the Food and Agriculture Organ
Page 250 and 251:
Exports of goods and nonfactor serv
Page 252 and 253:
spectively. Since 1987 data are not
Page 254 and 255:
The table reports the value of manu
Page 256 and 257:
teed, and private nonguaranteed lon
Page 258 and 259:
the Demographic and Health Surveys,
Page 260 and 261:
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
show all

Financial systems and development

Create successful ePaper yourself

Delete template?

Save as template?