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

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-2 The Role of the Financial System n Providing payment services n Matching savers and investors n Generating/distributing information n Allocating credit efficiently n Pricing, pooling, and trading risks n Increasing asset liquidity

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-3 The Painful Road to Macroeconomic Stability n 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

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-4 Financial Systems and Monetary Policy n Differences between MDC and LDC financial systems n The role of central banks

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-5 Table 16.1

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-6 Financial Systems and Monetary Policy n Differences between MDC and LDC financial systems n The role of central banks n The emergence of development banking n The role of informal finance, group lending, and microfinance institutions for small-scale enterprise

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-7 Reforming Financial Systems n Financial liberalization, real interest rates, savings, and investment

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-8 Figure 16.1

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-9 Reforming Third World Financial Systems n Financial liberalization, real interest rates, savings, and investment n Financial policy and the role of the state n Stock markets

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-10 Fiscal Policy for Development n Macro stability and resource mobilization n Taxation: direct and indirect –Personal income and property taxes –Corporate income taxes –Indirect commodity taxes –Problems of tax administration

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-11 Table 16.2

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-12 Table 16.3

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-13 Public Administration: the Scarcest Resource n Managerial/administrative capability is scarce because of: –A lack of training or experience –Political instability n Class, tribal, or religious conflict make public administration difficult n Bureaucracies are often overstaffed at the bottom and understaffed at the top

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-14 State-Owned Enterprises (SOEs) n Definition and description n Improving the performance of SOEs n Privatization: theory and experience

15. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-15 Table 16.4

16. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-16 Military Expenditures and Economic Development n Significance and economic impact

17. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-17 Table 16.5

18. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-18 Table 16.6

19. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-19 Table 16.7

20. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-20 Military Expenditures and Economic Development n Significance and economic impact n The end of the cold war: disarmament, conflict resolution, and human development

21. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-21 Concepts for Review n Central bank n Currency board n Currency substitution n Development banks n Direct taxes n Financial liberalization n Financial repression n Group lending schemes n Indirect taxes n Informal finance n Macroeconomic stabilization n Monetary policy n Money supply

22. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 16-22 Concepts for Review (cont’d) n Organized money markets n Privatization n Rationing n Rotating savings and credit associations n State-owned enterprises n Transparency n Unorganized money markets