Chapter 16
Finance and Fiscal
Policy for
Development
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The Role of the Financial System
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Providing payment services
Matching savers and investors
Generating/distributing information
Allocating credit efficiently
Pricing, pooling, and trading risks
Increasing asset liquidity
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16-2
The Painful Road to
Macroeconomic Stability
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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
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16-3
Financial Systems and Monetary
Policy
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Differences between MDC and LDC
financial systems
The role of central banks
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16-4
Table 16.1
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16-5
Financial Systems and Monetary
Policy
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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
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16-6
Reforming Financial Systems

Financial liberalization, real interest rates,
savings, and investment
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16-7
Figure 16.1
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16-8
Reforming Third World Financial
Systems
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Financial liberalization, real interest rates,
savings, and investment
Financial policy and the role of the state
Stock markets
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16-9
Fiscal Policy for Development
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Macro stability and resource mobilization
Taxation: direct and indirect
– Personal income and property taxes
– Corporate income taxes
– Indirect commodity taxes
– Problems of tax administration
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16-10
Table 16.2
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16-11
Table 16.3
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16-12
Public Administration: the
Scarcest Resource
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Managerial/administrative capability is
scarce because of:
– A lack of training or experience
– Political instability
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Class, tribal, or religious conflict make public
administration difficult
Bureaucracies are often overstaffed at the
bottom and understaffed at the top
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16-13
State-Owned Enterprises (SOEs)
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Definition and description
Improving the performance of SOEs
Privatization: theory and experience
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16-14
Table 16.4
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16-15
Military Expenditures and
Economic Development
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Significance and economic impact
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16-16
Table 16.5
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16-17
Table 16.6
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16-18
Table 16.7
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16-19
Military Expenditures and
Economic Development
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Significance and economic impact
The end of the cold war: disarmament,
conflict resolution, and human development
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16-20
Concepts for Review
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Central bank
Currency board
Currency substitution
Development banks
Direct taxes
Financial liberalization
Financial repression
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Group lending
schemes
Indirect taxes
Informal finance
Macroeconomic
stabilization
Monetary policy
Money supply
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Concepts for Review (cont’d)
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Organized money
markets
Privatization
Rationing
Rotating savings and
credit associations
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State-owned
enterprises
Transparency
Unorganized money
markets
16-22