Finance and Fiscal policy for

development
 Role of financial system
• Providing payment services
• Matches savers and investors
• Generating and distributing information
• Allocating credit effeciently
• Pricing, pooling and trading risks
• Increasing asset liquidity
Financial Institutions
 Central banks
• Role played in developed nations
– Issuer of currency and manager of foreign
reserves
– Banker to the govt. and domestic commercial
banks
– Regulator of domestic financial institutions
– Operator of monetary policy
 Role played in Developing Economies

• Structure of financial system- Foreign owned

Commercial banks, Informal credit network
system, financial institution inherited from
Colonial rulers, Currency substitution,
unskilled and inexperienced work force and
political influence.
 Other financial institutions

• Development Banks
• Commercial banks
• Informal finance and group lending
• Stock markets
 Reforming Financial Systems

• Financial liberalization, Real Interest rates,

saving and investment(Financial Repression)
• Role of states
Market Faliures(Stiglitz)
– Public good nature of Monitoring Information
– Externalities of Monitoring, Selection, and Lending
– Externalities of financial disruptions
– Missing and incomplete markets
– Imperfect competition
– Ineffeciencies of competitive markets of financial sector
– Uninformed investors
 Fiscal policy

• Macro stability and resource mobilization

• Taxation- Direct and indirect
• Property Taxes
• Corporate Income taxes
• Personal Income
• Indirect taxes on commodities