Financial systems and development

4 Financial sector issues
in developing countries
Governments have made control over finance an planned economies, large-scale production was
important tool of their development strategies dur- carried out by government entities to the virtual
ing the past few decades. Most believed that with- exclusion of independent organizations, decentralout
intervention their financial systems would not ized decisionmaking, and market forces.
be cooperative partners in the development effort. Although the extent of intervention varied
Dependent in the 1950s and 1960s on imports of among countries, nearly all governments considmanufactured
goods and exports of agricultural ered it necessary to intervene in the financial sector
products and raw materials, developing econo- in order to channel cheap credit toward the sectors
mies adopted a variety of strategies to promote that were to be at the forefront of development.
rapid industrialization and the modernization of The financial systems of most developing counagriculture.
A few, such as Hong Kong, the Re- tries in the 1950s and 1960s could not adequately
public of Korea, and Singapore, attempted from support a process of industrialization and agriculearly
on to integrate their economies with interna- tural modernization. Formal financial systems usutional
markets. Most countries, however, pursued ally consisted of a few institutions, often foreignan
industrialization strategy based on import sub- owned, which had branches in the major cities
stitution. Some provided only moderate and rela- only. These provided financing mainly to trading
tively uniform protection to domestic industries, companies, mines, and plantations, which were
primarily through tariffs, and others (Argentina, often foreign-owned as well. Local businesses had
India, and Tanzania, for example) provided exten- difficulty borrowing from banks; local farmers had
sive protection through high tariffs and quantita- no access to them at all. An indigenous informal
tive import restrictions.
financial sector made up of moneylenders, traders,
Developing country governments also took an and pawnbrokers provided loans to farmers and
active role in economic decisionmaking. At the small businesses (see Chapter 8). Informal lenders
very least, governments owned and controlled charged high rates, however, and the scale of lendcapital-intensive
infrastructure such as roads, ing was small. There were few sources of equity
ports, water and electric power utilities, and tele- and long-term finance for industry, and what was
communications. Many also controlled selected available was expensive. In some countries the
enterprises in heavy industry and natural resource banks were owned by industrial groups. This reextraction.
Several countries went further, bring- duced the access of outsiders to finance and coning
other industrial and commercial enterprises centrated a great deal of wealth and power in the
under government control as well. In centrally hands of a few.
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