Chapter 1515.1 The Role of the Financial System in Economic Development15.2 The Role of Central Banks and Alternative ArrangementsTable 15.1 Central Banking Institutions15.2 The Role of Central Banks and Alternative Arrangements (cont’d)Slide 615.3 Informal Finance and the Rise of MicrofinanceSlide 815.4 Reforming Financial SystemsFigure 15.1 The Effects of Interest-Rate Ceilings on Credit Allocation15.4 Reforming Financial Systems (cont’d)Slide 1215.5 Fiscal Policy for DevelopmentTable 15.2 Comparative Average Levels of Tax Revenue, 1985–1997, as a Percentage of GDPTable 15.3 Comparative Composition of Tax Revenue, 1985–1997, as a Percentage of GDP15.5 Fiscal Policy for Development (cont’d)15.6 State-Owned Enterprise and Privatization15.7 Public Administration: The Scarcest ResourceConcepts for ReviewConcepts for Review (cont’d)Copyright © 2012 Pearson Addison-Wesley. All rights reserved.Chapter 15Finance and Fiscal Policy for DevelopmentCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-215.1 The Role of the Financial System in Economic Development•Six major functions 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•Differences between developed and developing-country financial systemsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-315.2 The Role of Central Banks and Alternative Arrangements•Functions of a full-fledged central bank–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 policyCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-4Table 15.1 Central Banking InstitutionsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-515.2 The Role of Central Banks and Alternative Arrangements (cont’d)•Currency boards–Form of central bank that issues domestic currency for foreign-exchange at a fixed exchange rate•Alternatives to central banks–Transitional central banking institution–Supranational central bank–Currency enclave–Open-economy central banking institutionCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-615.2 The Role of Central Banks and Alternative Arrangements (cont’d)•The role of development banking•Development banks are specialized public and private financial intermediaries that provide medium- and long-term credit for development projects.Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-715.3 Informal Finance and the Rise of Microfinance•Traditional informal finance•Microfinance institutions (MFIs)–Microfinance provides financial services to people otherwise with no access or only with very unfavorable terms. –Includes microcredit, microsavings, and microinsurance–Primary focus: very small loans for microenterprises–Microcredit often uses group lending schemes (joint liability)–Provides “collateral of peer pressure” to jointly repay–An alternative without joint liability: “dynamic incentives,” in which loan sizes steadily increase when loans are repaid–Other alternatives to joint liabilityCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-815.3 Informal Finance and the Rise of Microfinance•MFIs: three current policy debates–Microfinance schism--Are subsidies appropriate? –Should credit be integrated with education, health, or other programs?–Should MFIs undergo commercialization, whereby an NGO providing microfinance is converted into a for-profit bank? •Potential limitations of microfinance as a development strategy–Microfinance is a powerful tool, but it needs to be complemented with other development and poverty policiesCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-915.4 Reforming Financial Systems•Financial liberalization, real interest rates, savings, and investment–Rationing–Financial repressionCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-10Figure 15.1 The Effects of Interest-Rate Ceilings on Credit AllocationCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-1115.4 Reforming Financial Systems (cont’d)•Financial policy and the role of the state–Stiglitz: seven financial market failures:•The “public good” nature of monitoring financial institutions•Externalities of monitoring, selection, and lending•Externalities of financial disruption•Missing and incomplete marketsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-1215.4 Reforming Financial Systems (cont’d)•Financial policy and the role of the state–Stiglitz: seven financial market failures (cont’d):•Imperfect competition•Inefficiency of competitive markets in the financial sector•Uninformed investors•Debate on the role of stock marketsCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-1315.5 Fiscal Policy for Development•Macrostability and resource mobilization•Taxation: direct and indirect–Five factors of the taxation potential of a country•Level of per capita real income•Degree of inequality in the distribution of that income•Industrial structure of the economy and the importance of different types of economic activity•Social, political, and institutional setting and the relative power of different groups•Administrative competence, honesty, and integrity of the tax-gathering branches of governmentCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-14Table 15.2 Comparative Average Levels of Tax Revenue, 1985–1997, as a Percentage of GDPCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-15Table 15.3 Comparative Composition of Tax Revenue, 1985–1997, as a Percentage of GDPCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-1615.5 Fiscal Policy for Development (cont’d)•Personal income and property taxes•Corporate income taxes•Indirect taxes on commodities•Problems of tax administrationCopyright © 2012 Pearson Addison-Wesley. All rights reserved. 15-1715.6 State-Owned Enterprise and Privatization•State-owned enterprises (SOEs)—public corporations and parastatal agencies owned and operated by the government.•Improving the performance of