copyright © 2009 pearson addison-wesley. all rights reserved. chapter 15 finance and fiscal policy...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 15

Finance and Fiscal Policy for Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-2

The Role of the Financial System

• Providing payment services

• Matching savers and investors

• Generating/distributing information

• Allocating credit efficiently

• Pricing, pooling, and trading risks

• Increasing asset liquidity


The Bumpy Road to Macroeconomic Stability

• Macroeconomic stabilization has three objectives:– Getting inflation under control

– Restoring fiscal balance by reducing governmental spending and by raising government tax revenues

– Eliminating the current account deficit by means of devaluation and export promotion



• Differences between MDC and LDC financial systems– Monetary policy

– Money supply

– Who are the Keynesian economist?

– What is currency substitution?

– Currency substitution



• Differences between MDC and LDC financial systems (cont’d)– Transparency

– Organized and unorganized money market

– Financial liberalization



• The role of central banks:– Issuer of currency and manager of foreign

reserves

– Banker to the government

– Banker to domestic commercial banks

– Regulator of domestic financial institutions

– Operator of monetary and credit policy


Table 15.1 Central Banking Institutions



• The role of development banking– Development banks

• Informal finance– Rotating savings and credit association

(ROSCAs)


Microfinance Institutions

• What is microfinance?

• Group lending schemes


Reforming Financial Systems

• Financial liberalization, real interest rates, savings, and investment– Rationing

– Financial repression


Figure 15.1 The Effects of Interest-Rate Ceilings on Credit Allocation



• Financial policy and the role of the state– Stiglitz’ seven market failures:• The public good nature of monitoring financial

institutions

• Externalities of monitoring selection, and lending

• Externalities of financial disruption

• Missing and incomplete markets



• Financial policy and the role of the state– Stiglitz’ seven market failures (cont’d):• Imperfect competition

• Inefficiency of competitive markets in the financial sector

• Uninformed investors

• Debate on the role of stock markets


Fiscal Policy for Development

• Macrostability and resource mobilization

• Taxation: direct and indirect– Five factors of the taxation potential of a country


Table 15.2 Comparative Average Levels of Tax Revenue, 1985–1997, as a Percentage of GDP


Table 15.3 Comparative Composition of Tax Revenue, 1985–1997, as a Percentage of GDP


Public Administration: The Scarcest Resource

• Case of the Tazara railroad through Tanzania and Zambia


State-Owned Enterprises (SOEs)

• Improving the performance of SOEs

• Privatization: Theory and experience


Military Expenditures and Economic Development

• What is military expending?


Table 15.4 Trends in Global Military Spending, 1960–2000 (billions of U.S. dollars)


Table 15.5 World Military Expenditures, 1994–2003 (billions of 2000 U.S. dollars)


Table 15.6 Military and Social Expenditures in Developing and Industrial Countries, 1995


Table 15.7 Countries with the Highest and Lowest Expenditures on the Military, 2002 (% of GDP)


Case Study: Chile


Case Study: Poland


Concepts for Review

• Central bank

• Currency board

• Currency substitution

• Development banks

• Direct taxes

• Financial liberalization

• Financial repression

• Group lending schemes

• Indirect taxes

• Informal finance

• Macroeconomic stabilization

• Microfinance

• Monetary policy

• Money supply


Concepts for Review (cont’d)

• Organized money markets

• Privatization

• Rationing

• Rotating savings and credit associations (ROSCA)

• State-owned enterprises (SOEs)

• Transparency

• Unorganized money markets

copyright © 2009 pearson addison-wesley. all rights reserved. chapter 15 finance and fiscal policy...

Documents

pearson addisonwesley

financial repression

development slide

credit policy slide

credit allocation slide

currency substitution

asset liquidity slide

bumpy road