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M15_TodaroSmith013934_12_Econ_C15.ppt
- 1. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
Chapter 15
Finance and
Fiscal Policy for
Development
- 2. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-2
15.1 The Role of the Financial System in
Economic Development
âą Six major functions of the financial system
â Providing payment services
â Matching savers and investors
â Generating/distributing information
â Allocating credit efficiently
â Pricing, pooling, and trading risks
â Increasing asset liquidity
âą Differences between developed and
developing-country financial systems
- 3. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-3
15.2 The Role of Central Banks and
Alternative Arrangements
âą Functions of a full-fledged central bank
â Issuer of currency and manager of foreign
reserves
â Banker to the government
â Banker to domestic commercial banks
â Regulator of domestic financial institutions
â Operator of monetary and credit policy
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15-4
Table 15.1 Central Banking Institutions
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15-5
15.2 The Role of Central Banks and
Alternative Arrangements (contâd)
âą Currency boards
â Form of central bank that issues domestic
currency for foreign-exchange at a fixed
exchange rate
âą Alternatives to central banks
â Transitional central banking institution
â Supranational central bank
â Currency enclave
â Open-economy central banking institution
- 6. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-6
15.2 The Role of Central Banks and
Alternative Arrangements (contâd)
âą The role of development banking
âą Development banks are specialized public
and private financial intermediaries that
provide medium- and long-term credit for
development projects.
- 7. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-7
15.3 Informal Finance and the Rise of
Microfinance
âą Traditional informal finance
âą Microfinance institutions (MFIs)
â Microfinance provides financial services to people otherwise
with no access or only with very unfavorable terms.
â Includes microcredit, microsavings, and microinsurance
â Primary focus: very small loans for microenterprises
â Microcredit often uses group lending schemes (joint liability)
â Provides âcollateral of peer pressureâ to jointly repay
â An alternative without joint liability: âdynamic incentives,â in
which loan sizes steadily increase when loans are repaid
â Other alternatives to joint liability
- 8. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-8
15.3 Informal Finance and the Rise
of Microfinance
âą MFIs: three current policy debates
â Microfinance schism--Are subsidies appropriate?
â Should credit be integrated with education, health, or
other programs?
â Should MFIs undergo commercialization, whereby an
NGO providing microfinance is converted into a for-profit
bank?
âą Potential limitations of microfinance as a
development strategy
â Microfinance is a powerful tool, but it needs to be
complemented with other development and poverty
policies
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15-9
15.4 Reforming Financial Systems
âą Financial liberalization, real interest rates,
savings, and investment
â Rationing
â Financial repression
- 10. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-10
Figure 15.1 The Effects of Interest-Rate
Ceilings on Credit Allocation
- 11. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-11
15.4 Reforming Financial Systems
(contâd)
âą Financial policy and the role of the state
â Stiglitz: seven financial market failures:
âą The âpublic goodâ nature of monitoring financial
institutions
âą Externalities of monitoring, selection, and lending
âą Externalities of financial disruption
âą Missing and incomplete markets
- 12. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-12
15.4 Reforming Financial Systems
(contâd)
âą Financial policy and the role of the state
â Stiglitz: seven financial market failures (contâd):
âą Imperfect competition
âą Inefficiency of competitive markets in the financial sector
âą Uninformed investors
âą Debate on the role of stock markets
- 13. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-13
15.5 Fiscal Policy for Development
âą Macrostability and resource mobilization
âą Taxation: direct and indirect
â Five factors of the taxation potential of a
country
âą Level of per capita real income
âą Degree of inequality in the distribution of that income
âą Industrial structure of the economy and the
importance of different types of economic activity
âą Social, political, and institutional setting and the
relative power of different groups
âą Administrative competence, honesty, and integrity of
the tax-gathering branches of government
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15-14
Table 15.2 Comparative Average Levels of Tax
Revenue, 1985â1997, as a Percentage of GDP
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15-15
Table 15.3 Comparative Composition of Tax
Revenue, 1985â1997, as a Percentage of GDP
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15-16
15.5 Fiscal Policy for Development
(contâd)
âą Personal income and property taxes
âą Corporate income taxes
âą Indirect taxes on commodities
âą Problems of tax administration
- 17. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-17
15.6 State-Owned Enterprise and
Privatization
âą State-owned enterprises (SOEs)âpublic
corporations and parastatal agencies
owned and operated by the government.
âą Improving the performance of SOEs
âą Privatization: theory and experience
- 18. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-18
15.7 Public Administration: The Scarcest
Resource
âą Administrative capability is a scarce public
resource in the developing world
âą The administrative component of economic
development should not be
underestimated
- 19. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-19
Concepts for Review
âą Central bank
âą Commercialization
âą Currency board
âą Currency substitution
âą Development banks
âą Direct taxes
âą Financial liberalization
âą Financial repression
âą Group lending schemes
âą Indirect taxes
âą Informal finance
âą Microfinance
âą Monetary policy
âą Money supply
âą Organized money markets
- 20. Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
15-20
Concepts for Review (contâd)
âą Privatization
âą Rationing
âą Rotating savings and credit
associations (ROSCA)
âą State-owned enterprises
(SOEs)
âą Transparency (financial)
âą Unorganized money market