Financial systems and development

they stood to benefit and had a strong hold on institutions that specialized in long-term finance.
government policies. Latin American countries oc- National investment banks or institutions, such
casionally suspended the servicing of their exter- as Cr6dit National in France and the Industrial
nal debt. Foreign lenders, however, were usually Bank of Japan, promoted industrial development
lenient, probably because the region had immense through medium- and long-term lending and eqpotential
for profitable investment. Major interna- uity participations. They also encouraged the use
tional houses arranged so-called funding loans, of modern techniques of lending and credit
such as the Brazilian loan of 1898, which had many appraisal.
features in common with the multiyear reschedul- Direct government intervention in the financial
ing agreements of recent years. In contrast, foreign systems of several industrial countries increased
lenders imposed strict controls on the finances of with the nationalization of large commercial banks
many other countries, such as China, Egypt, (for example, in France and Italy) in the aftermath
Greece, and Turkey. Their governments were of the crisis of the 1930s and World War II. Public
forced to cede revenues from stamp and customs sector banks-postal savings banks, postal giros,
duties and from state monopolies (on salt, and savings banks linked with regional and local
matches, and tobacco) until the debts were fully government, as in Germany and Switzerlandrepaid.
also extended their reach. Special export credit in-
International banking crises seriously affected stitutions, such as the U.S. Export-Import Bank,
the financial markets of Latin America and the supplied export finance.
Mediterranean countries. At the first signs of trou- Domestic and international financial activities exble,
foreign banks withdrew capital by calling their panded, new institutions such as leasing and facloans,
reducing their advances, and pressing for toring companies came into being, and the conremittances.
The financial systems of Africa and tractual savings institutions continued to grow.
Asia were better insulated, but their economies Noncommercial financial institutions, such as muwere
hit just as hard by the effect of financial tur- tual and municipal savings banks, urban and agrimoil
on international trade.
cultural credit cooperatives, building societies and
World War I and the depression of the 1930s savings and loan associations, came to play a
played havoc with the world economy. Latin prominent part in financing small and medium-
American countries were particularly affected by size enterprises, agriculture, and housing. Despite
the development of man-made raw materials and mergers, competition intensified because the dethe
transformation of the British Commonwealth marcation lines between different types of instituinto
a protectionist bloc. Most of them defaulted tions were eroding and because domestic markets
on their foreign debts, but the central and other were opening up to foreigners. In most countries
state banks that had been created in the 1920s the trend toward universal banking continued: the
averted the panics of earlier periods.
big commercial banks moved into a variety of an-
Before World War II, developing country govern- cillary services, such as insurance brokering, fund
ments had a poor record on financial development. management, and securities transactions (see Box
In Latin America and the Mediterranean countries, 3.6).
they failed to create sound legal and regulatory Regulation, taxation, and the organization of sosystems
and to maintain macroeconomic stability. cial security played a significant role in shaping the
Borrowers relied excessively on foreign capital, structure of different financial systems. In the
and financial systems were undermined by impru- United States, commercial banks continued to be
dence. In Africa and Asia the restricted use of bank prevented from becoming nationwide, universal
credit, the limited spread of the banking habit, and banks-although the development of bank holding
the persistence of the hoarding habit were all lega- companies made the restrictions less binding. At
cies of colonial banking systems that had failed to the same time, the growth of funded occupational
reach the indigenous population.
pension schemes increased the supply of longterm
funds to the securities markets. Australia,
Financial regulation after World War II
Britain, and Canada saw similar developments, although
none placed restrictions on nationwide
After World War II, governments began to take a banking.
greater interest in the financing of high priority In Germany and other continental European
sectors such as industrial investment, exports, and countries, securities markets played a much
housing. They created, or helped to create, credit smaller role in the financial system. This was be-
49