Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 16 Finance and Fiscal Policy for Development

Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Chapter 16

Finance and Fiscal Policy for Development

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-2

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 Painful Road to Macroeconomic Stability

Macro stabilization has three main objectives:– Controlling inflation– 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


Financial Systems and Monetary Policy

Differences between MDC and LDC financial systems

The role of central banks


Table 16.1


Financial Systems and Monetary Policy

Differences between MDC and LDC financial systems

The role of central banks The emergence of development banking The role of informal finance, group lending,

and microfinance institutions for small-scale enterprise


Reforming Financial Systems

Financial liberalization, real interest rates, savings, and investment


Figure 16.1


Reforming Third World Financial Systems

Financial liberalization, real interest rates, savings, and investment

Financial policy and the role of the state Stock markets


Fiscal Policy for Development

Macro stability and resource mobilization Taxation: direct and indirect

– Personal income and property taxes– Corporate income taxes– Indirect commodity taxes– Problems of tax administration


Table 16.2


Table 16.3


Public Administration: the Scarcest Resource

Managerial/administrative capability is scarce because of:– A lack of training or experience– Political instability

Class, tribal, or religious conflict make public administration difficult

Bureaucracies are often overstaffed at the bottom and understaffed at the top


State-Owned Enterprises (SOEs)

Definition and description Improving the performance of SOEs Privatization: theory and experience


Table 16.4


Military Expenditures and Economic Development

Significance and economic impact


Table 16.5


Table 16.6


Table 16.7


Military Expenditures and Economic Development

Significance and economic impact The end of the cold war: disarmament,

conflict resolution, and human development


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 Monetary policy Money supply


Concepts for Review (cont’d)

Organized money markets

Privatization Rationing Rotating savings and

credit associations

State-owned enterprises

Transparency Unorganized money

markets

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Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 16 Finance and Fiscal Policy for Development