1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 15 Finance and Fiscal Policy for Development

2. 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

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-3 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

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-4 The Bumpy Road to Macroeconomic Stability Differences between MDC and LDC financial systems – Monetary policy – Money supply – Who are the Keynesian economist? – What is currency substitution? – Currency substitution

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-5 The Bumpy Road to Macroeconomic Stability Differences between MDC and LDC financial systems (cont’d) – Transparency – Organized and unorganized money market – Financial liberalization

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-6 The Bumpy Road to Macroeconomic Stability 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

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-7 Table 15.1 Central Banking Institutions

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-8 The Bumpy Road to Macroeconomic Stability The role of development banking – Development banks Informal finance – Rotating savings and credit association (ROSCAs)

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-9 Microfinance Institutions What is microfinance? Group lending schemes

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-10 Reforming Financial Systems Financial liberalization, real interest rates, savings, and investment – Rationing – Financial repression

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-11 Figure 15.1 The Effects of Interest- Rate Ceilings on Credit Allocation

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-12 Reforming Financial Systems 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

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-13 Reforming Financial Systems 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

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-14 Fiscal Policy for Development Macrostability and resource mobilization Taxation: direct and indirect – Five factors of the taxation potential of a country

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-15 Table 15.2 Comparative Average Levels of Tax Revenue, 1985–1997, as a Percentage of GDP

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-16 Table 15.3 Comparative Composition of Tax Revenue, 1985–1997, as a Percentage of GDP

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-17 Public Administration: The Scarcest Resource Case of the Tazara railroad through Tanzania and Zambia

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-18 State-Owned Enterprises (SOEs) Improving the performance of SOEs Privatization: Theory and experience

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-19 Military Expenditures and Economic Development What is military expending?

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-20 Table 15.4 Trends in Global Military Spending, 1960–2000 (billions of U.S. dollars)

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-21 Table 15.5 World Military Expenditures, 1994–2003 (billions of 2000 U.S. dollars)

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-22 Table 15.6 Military and Social Expenditures in Developing and Industrial Countries, 1995

23. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-23 Table 15.7 Countries with the Highest and Lowest Expenditures on the Military, 2002 (% of GDP)

24. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-24 Table 15.7 Countries with the Highest and Lowest Expenditures on the Military, 2002 (% of GDP)

25. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-25 Case Study: Chile

26. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-26 Case Study: Poland

27. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-27 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

28. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-28 Concepts for Review (cont’d) Organized money markets Privatization Rationing Rotating savings and credit associations (ROSCA) State-owned enterprises (SOEs) Transparency Unorganized money markets