Financial systems and development

Figure 4.2 Real interest rates in developing countries and the United States, 1967 to 1985
Percent
12
8-Asia
hg X ~~~~~~~~~~~U.S.
Treasury bill ,s ;
4 _
8 _________ __
_X_ __ ___,_
-- Oor~~~~~~~~~~~~~adNot fi
- 1 6 Latin America and the Caribbean
\ Middle East Average,Europe,
Sub-Saharan Africa
1967 1970 1973 1976 1979 1982 1985
Note: Data are unweighted averages based on a sample of thirty-five low- and middle-income countries, eight of them in Europe, Middle
East, and North Africa and nine in each of Sub-Saharan Africa, Asia, and Latin America and the Caribbean.
a. Average for the sample of thirty-five developing countries.
Source: Gelb (background paper) and IMF, International Financial Statistics.
deregulation. Some countries with unstable mac- demand for credit and force financial institutions
roeconomic conditions and distressed banks and to ration their lending-which may favor borrowborrowers
have seen real interest rates on nonpref- ers who need the money least. By preventing fierential
credit rise to high levels (see Table 4.2). nancial institutions from charging higher interest
Real rates have also been high in some economi- rates on longer-term and riskier loans, governcally
stable countries that administered rates, (for ments' interest rate policies have discouraged the
example, Korea and Thailand) because of a decline very sort of lending they sought to foster. Together
in inflation and strong loan demand. Although with directed credit programs, they have also dismoderately
positive real interest rates are desir- couraged competition. The combination of inflaable,
extremely high real rates are not. They can tion and low deposit rates has led to capital outcause
distress among borrowers (see Chapter 5) flows and thereby reduced the resources available
and swell fiscal deficits. Chapter 9 returns to the for relending by financial intermediaries. The dedifficulties
confronting governments that intend to velopment of unofficial (curb) markets, however,
liberalize their financial systems.
has alleviated some of the adverse consequences of
Interest rate controls and inflation have had interest rate and other controls (see Box 4.7).
other adverse consequences as well. As noted Inflation, by causing uncertainty and instability
above, artificially low interest rates cause excess in relative prices, makes longer-term investments
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