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5. In what ways do you think LCDs taxation and expender systems could be improved? Be specific.

Markets and financial institutions in many developing countries are highly unorganized, often externally dependent, and spatially fragmented. Many LDC commercial banks are merely overseas branches of major private banking institutions in developed countries. Their orientation, therefore, like that of multinational corporations, may be more toward external and less toward internal monetary situations. The ability of LDC governments to regulate the national supply of money is further constrained by the openness of their economies, in some cases the pegging of their currencies to the dollar or to a basket of MDC currencies, and the fact that the accumulation of foreign—currency earnings is a significant but highly variable source of their domestic financial resources. Even the money supply itself may be difficult to measure and more difficult to control when there are, as in many LDCs, problems of currency substitution, whereby foreign currencies serve as an alternative to the domestic currency . Most important, because of limited information and incomplete credit markets, the commercial banking system of many LDCs lacks transparency and often restricts its activities almost exclusively to rationing scarce loanable funds to medium- and largescale enterprises in the modern manufacturing sector that are deemed more creditworthy This lack of transparency, and the fact that many borrowers were not creditworthy. As a result, small farmers and indigenous small-scale entrepreneurs and traders in both the formal and informal manufacturing and service sectors must traditionally seek financing elsewhere sometimes from family members and relatives, but more typically from loc moneylenders and loan sharks, who charge exorbitant rates of interest. Thus most developing countries have operated under a dual monetary system: a small and often externally controlled or influenced organ zed money market with binding legal restrictions on nominal interest-rate ceilings, catering to the financial requirements of a special group of middle- and upper—class local and foreign businesses in the modern industrial sector, and a large but amorphous unorganized money market, uncontrolled, illegal, and often usurious, to which most low—income individuals are obliged to turn in times of financial need. This is another manifestation of the dual structure of many LDC economies and their tendency, intentional or not, to serve the needs of wealthy elites while neglecting the requirements of the relatively poor. One possible step toward the elimination of this major factor price distortion would be the removal of artificially low nominal interestrate ceilings in the organized market as well as other related steps toward financial liberalization (e.g., loosening of the foreignexchange rate). Higher interest rates should generate more domestic savings, whereas greater transparency and more market—oriented real interest rates should better allocate loanable funds to the most productive projects. However, such coordinated liberalization of domestic financial and foreign-exchange markets is unlikely to solve the problem of channeling credit to small investors and

The basic idea was that artificially low rates would encourage investment. and promote industrial output growth. licensing restrictions. But there may be severe structural supply constraints (low elasticities of supply) inhibiting the expansion of output even when the demand for it increases. including savings mobilization. Attempts to control inflation with fixed or slowly depreciating exchange rates led to major financial crises in Brazil in 1999 and Argentina in 2001-2002. structural supply rigidities mean that any increase in the demand for goods and services generated by rapid money creation will not be matched by increases in supply Instead. These constraints include poor management. financial systems provide a variety of needed services. In developing nations. for investment goods) will merely bid up prices and cause inflation. and expanded output. in the context of severe macroeconomic instability of high inflation accompanied by large budget and trade deficits. Moreover. they represent a key element in any overall stabilization effort. bureaucratic rigidities. Moreover. Let’s therefore begin our examination of the structure of LDC financial systems with a look at the central bank. .entrepreneurs. and foreignexchange facilitation. finance the fiscal deficit. risk limitations. Brazil and Argentina) have in the past followed a policy of inflation-financed industrial growth. For example. insurance protection. Whatever the reasons. In some Latin American nations. in which expansionary monetary policy in conjunction with large budgetary deficits resulted in negative real interest rates (inflation rates exceeding nominal interest levels).g. We will discuss both financial market reform and measures to improve finance for the informal economy later in the chapter. such "structural" inflation has been a chronic problem made even worse on the cost side by the upward spiral of wages as workers attempt to protect their real income levels by indexing wage increases to price rises. higher investment. a number of larger countries in Latin America (e. The second major limitation of standard monetary theory and policy is the assumption of a direct link among lower interest rates. credit allocation. investment decisions are often not very sensitive to interest-rate movements.756 earlier. Nevertheless LDC financial systems remain an integral component of the general economic system. and an overall lack of industrial-sector interdependence. the excess demand (in this case. the absence of essential (usually imported) intermediate products. as noted P..That will require more direct new initiatives.

Moreover. Personnel systems in the public service are usually not adequate for the increased management complexities of an industrial enterprise. In the case of nationalized industries. where kinship P775 ties are strong and such concepts as statehood and public service have not yet taken firm root. or religious conflict within . traditional incentives to perform in the wider public interest may not have much appeal. there is little regard for a merit system. the more difficult it will be to maintain continuity in the formulation and execution of policy. Acute conditions of class. ad hocracy (temporary arrangements). development corporations. It also arises out of the political instability of numerous developing nations. quasigovernmental bodies. what can LDCs do to relieve this constraint? What are the options? Discuss.6. or to include or exclude minorities. Most governments also are organized in the traditional hierarchical form. where the dominant values are sectarian. The greater the number of parastatal organizations set up—the more state-owned enterprises and nationalized industries. Public Administration: The Scarcest Resource Many observers would argue that the shortage of public (and private) administrative capability is the single scarcest public resource in the developing world. Public administration is unlikely to function efficiently when the rule of law is in question. In a highly traditional society. The problem is not only a lack of training or experience. If the scarcity of administrative capabilities is a serious constraint on development policy implementation. to reflect or favor an ethnic ratio. to nationalize the civil service. when there is public disorder. But some have experimented with negative hierarchy (from bottom to top). and training institutionsthe thinner this layer of managers is spread. Similarly. When power is constantly changing hands. Many LDC governments may also have civil service goals other than performance: to break up traditional elites. to conform to ideological correctness. and polyarchy (cooperation with outside organizations). considerations of efficiency and public welfare are likely to be subordinated to political loyalty. Many LDC bureaucracies are overstaffed at the bottom and understaffed at the top. So parallel per- . tribal. most experiments have been economically disastrous and have resulted in all kinds of strains within the central civil service. the larger the group of officials affected by a change of power. or when there is little consensus on fundamental issues. There is a chronic and desperate shortage of skilled competent managers capable of independent decision making. this last being attempted particularly when some special form of expertise is involved.2 society will usually be reflected in the management and operation of government departments and public agencies.

could not cope. The first consignments from the United States were unloaded at Dar es Salaam. and the plowing season had begun. OAU pressures.000 tons to Dar es Salaam because of the congestion there. the capital of Tanzania. In October 1978. some 100. Shippers refused to take the remaining 90. which do not get paid until the copper is on the high seas. and resulting in manpower shortages and morale problems. Tanzania and Zambia would have to start repaying their $400 million debt to China.000 in transport costs. In addition. it became clear that Mozambique’s railways and Zambia’s transporters. Political considerations often affect the ability to recruit competent managers with special technical skills. Mozambique. President Kaunda of Zambia announced that effective immediately and despite UN sanctions. was built in less than five years by the Chinese and was formally opened in Iuly 1976. Zambia then suggested it go to Maputo.000 tons had arrived in Zambia. Further stockpiles at the mines reached 70. whence it went by rail to the town of Moatize and then by road through Malawi and Zambia. In four years’ time. A striking example of the administration problem is provided by the case of the Tazara railroad through Tanzania and Zambia. from which it could be carried by South African Railways through South Africa via Pretoria and Mafeking to Francistown. Production was hampered by shortages of spare parts and lubricating oil. After 60. giving Zambia access to the sea at Dar es Salaam. where an armada of small Zambian truckers would carry it across the Kazungulu ferry. where the railway was unable to handle them.000 tons had been transported. nationalization in many instances has often added to the financial burden of the government budget. and the civil war in Zimbabwe. draining skills. But whatever the organizational and political problems of public administration. and they were left in the open to rot. In short.000 tons of Zambian copper was either awaiting transportation or trapped somewhere on the line. causing cash shortages to the copper companies. The Tazara railway. About 100 Chinese specialists were brought back to try to restore the line to working order. More than half the locomotives were under repair. Maputo and Francistown were drowning in fertilizer. A quarter of the 2. Tanzania was reported to have increased storage and demurrage P776 charges by 1. Zambia then ordered the fertilizer rerouted through Beira. only 2.sonnel systems have been set up. already short of fuel and spare parts. In early 1978. which were held up elsewhere.000 tons by early October. the European Community had granted Zambia $8 million for fertilizer desperately needed by its ailing agricultural sector.100 freight cars were off the line at . multiplying the public service systems. they saw little chance of its paying its way unless its administration was completely overhauled. leading to disparities in terms and conditions of service. the sheer difficulty of efficiently managing complex modern economic systems is often cited when referring to critical public policy issues in the developing world. he was reopening Zambia’s border with Zimbabwe and resuming the interrupted rail link with the south. The reason was that massive administrative breakdowns had so impaired the functioning of the Tazara railway that it was threatening to strangle the entire Zambian economy. Mozambique. As the pileup increased.000%. Zambia had spent an extra $25. By the end of September.

. and the railway was owed millions of dollars. Without huge spending on new equipment and training programs. It serves to illustrate the crucial importance of the administrative component in economic development—not only in relation to the particular project under consideration but also in relation to the functioning of the entire public and private economic system. unanticipated in any feasibility study or economic blueprint. there was little possibility of Tazara handling a fraction of its capacity. The accounting department wasn’t getting the bills out.any one time. even massive spending would not necessarily guarantee results. This is a dramatic example of an administrative shortfall in one sector. the effects of which were felt not only in other sectors of the Zambian economy but also in neighboring countries.