Interest rate reform and private investment behaviour in developing countries: Evidence from Peru

The principle aims to be achieved by financial liberalization in financially repressed developing countries are to increase the volume of investments and to improve their allocative efficiency. The theoretical and empirical literature stresses the importance of raising real interest rates in countries .with interest rate ceilings and permanently or at least temporary negative real interest rates. This reform proposal is based on the expectation that higher real interest rates would induce private households to save more in the commercial banking system, thereby enabling financial institutions to expand their credit supply to private firms. Assuming that private investments were constrained by the non-availability of credit before the financial reform was implemented, those firms are supposed to increase their real capital formation.

Peru at the brink of economic collapse: Current problems and policy options

Since 1988 Peru has plunged into a deep economic crisis which has already caused severe social strife and threatens to uproot the young democratic system. The present government seems to be unable to arrest the precipitous decline of per capita income of the Peruvian population. Therefore, the result of the next presidential elections in early 1990 will hinge on the credibility of the candidates' economic reform programmes. The Peruvian economy is suffering from large government deficits, a declining international competitiveness, an outdated and underutilised capital stock, and substantial arrears on the high debt burden. These structural deficiencies have resulted in an economic quandary which is characterized by hyperinflation, a drain of foreign exchange reserves, a dramatic decline of output, and mass unemployment. The economic plight of Peru can largely be attributed to a long history of policy failures. Adverse external developments such as low commodity prices or high interest rates were of minor importance. A comprehensive and consistent policy reform programme accompanied by foreign financial support would go a long way in bringing Peru back to a sustained and socially acceptable growth path. Priority areas for policy reform are to stop hyperinflation by public expenditure cuts and a tax reform, to improve domestic resource mobilisation by dismantling financial sector regulations, and to regain international competitiveness by exchange rate adjustment and lower import protection. Successful adjustment of the Peruvian economy will require an internationally-agreed temporary suspension of debt service payments and a supply of fresh funds to finance restructuring. Domestically, social hardship caused by adjustment has to be eased by targeted food subsidies to the poor. --

Government regulations, external financing, and economic performance: The case of Chile

Most Latin American countries relied to a large extent on foreign funds to finance their economic development in the seventies and eighties. However, important differences existed with respect to the structure of their capital inflows, the regulations affecting different types of inflows and their overall economic performance. The relative importance of debt finance and foreign direct investments (fdi) in total external liabilities differed significantly between major Latin American borrowers, such as Brazil, Chile and Mexico. In Chile, fdi accounted for only 12 per cent of total external liabilities in 1973 while the ratios were 37 and 23 per cent for Brazil and Mexico respectively (Appendix Table A3). On the other hand, it was only in Chile that the stock of fdi increased relative to total debt outstanding recently.

Savings mobilisation in developing countries

Stagnating development aid and continued reluctance on the part of western commercial banks to grant new loans to problem debtor countries have led many developing countries to pay greater attention to the mobilisation of their own resources. This article outlines a strategy for increasing the extent to which domestic savings are made available for development financing

Erfolgsbedingungen einer Zinsliberalisierung in Entwicklungsländern

Die hohe Auslandsverschuldung zwingt viele Entwicklungsländer, ausländische Kredite durch heimische Ressourcen zu ersetzen. Entsprechend gewinnt die Mobilisierung von zusätzlichem inländischen Sparkapital für die Entwicklungsfinanzierung an Bedeutung. In der Literatur, die sich mit den Möglichkeiten beschäftigt, das inländische Sparaufkommen zu erhöhen, nimmt die Wahl der richtigen Zinspolitik eine Schlüsselstellung ein. Die Vertreter einer liberalen Zinspolitik (z.B. Shaw, 1973 und McKinnon, 1973) sehen in den wenig flexiblen Höchstzinsvorschriften vieler Entwicklungsländer, die bei hohen Inflationsraten oft nur negative Realzinsen für Spareinlagen erlauben, die Hauptursache der zu geringen Spartätigkeit. Dem halten die Befürworter einer staatlich administrierten Niedrigzinspolitik z.B. entgegen, daß das Sparverhalten der Bevölkerung in Entwicklungsländern nicht zinselastisch sei, sondern die Hemmnisse der Sparkapitalbildung in dem geringen Einkommen und der unzureichenden finanziellen Infrastruktur (Bankendichte etc.) lägen. Die Frage, in welchem Ausmaß die inländischen Ersparnisse auf eine Veränderung der Realzinssätze reagieren und wie sich dabei das inländische Kreditangebot verändert, ist somit zentral für den Erfolg einer Zinsreform

Interest rate policies and domestic savings mobilization: A survey of the empir. evidence of Asian countries

The liberalization of interest rates has become more and more an integrated part of the policy advice given to developing countries in order to stimulate domestic savings and to improve the allocative efficiency of investments . One of the most critical assumptions behind this policy approach refers to a high and positive interest rate elasticity of savings. Empirically, this assumption seems not to be supported unanimously. Giovannini (1983) , for instance, concludes from his survey of a sample of econometric studies that the notion of a positive impact of higher interest rates on national savings is not warranted empirically. This would lead to the conclusion that the expected success from interest liberalization policies would be questionable. However, such a judgement is not justified because the mentioned survey has various shortcomings. First, the range of empirical studies covered in the overview is rather limited. Second, the discussion of the interest rate elasticity of savings is not differentiated enough with respect to different savings aggregates. Third, some of the specification and methodological problems existing in estimating interest elasticities of savings are not tackled sufficiently.

Interest rate reform and private investment behaviour in developing countries: Evidence from Peru

The principle aims to be achieved by financial liberalization in financially repressed developing countries are to increase the volume of investments and to improve their allocative efficiency. The theoretical and empirical literature stresses the importance of raising real interest rates in countries .with interest rate ceilings and permanently or at least temporary negative real interest rates. This reform proposal is based on the expectation that higher real interest rates would induce private households to save more in the commercial banking system, thereby enabling financial institutions to expand their credit supply to private firms. Assuming that private investments were constrained by the non-availability of credit before the financial reform was implemented, those firms are supposed to increase their real capital formation

Peru at the brink of economic collapse: Current problems and policy options

Since 1988 Peru has plunged into a deep economic crisis which has already caused severe social strife and threatens to uproot the young democratic system. The present government seems to be unable to arrest the precipitous decline of per capita income of the Peruvian population. Therefore, the result of the next presidential elections in early 1990 will hinge on the credibility of the candidates' economic reform programmes. The Peruvian economy is suffering from large government deficits, a declining international competitiveness, an outdated and underutilised capital stock, and substantial arrears on the high debt burden. These structural deficiencies have resulted in an economic quandary which is characterized by hyperinflation, a drain of foreign exchange reserves, a dramatic decline of output, and mass unemployment. The economic plight of Peru can largely be attributed to a long history of policy failures. Adverse external developments such as low commodity prices or high interest rates were of minor importance. A comprehensive and consistent policy reform programme accompanied by foreign financial support would go a long way in bringing Peru back to a sustained and socially acceptable growth path. Priority areas for policy reform are to stop hyperinflation by public expenditure cuts and a tax reform, to improve domestic resource mobilisation by dismantling financial sector regulations, and to regain international competitiveness by exchange rate adjustment and lower import protection. Successful adjustment of the Peruvian economy will require an internationally-agreed temporary suspension of debt service payments and a supply of fresh funds to finance restructuring. Domestically, social hardship caused by adjustment has to be eased by targeted food subsidies to the poor

Liberalisation of the capital markets in developing countries

The domestic capital markets of developing countries are typically subject to serious inefficiencies. This article shows how these inefficiencies can be eliminated without necessarily provoking an adjustment crisis and indicates the measures on which emphasis must be placed in the context of structural adjustment assistance in order to mobilise a large volume of savings and achieve a better allocation of resources