|Investment Finance in Economic Development
Book by Routledge, 1995
Financial structures, financial development and economic development
It was pointed out earlier in this book that less developed countries (LDCs) commonly have thin or even no organised financial markets (see, for example, Goldsmith 1969; McKinnon 1973; World Bank 1989). According to the mainstream view, this institutional underdevelopment is the result of the 'long history of financial repression in developing countries' (Fry 1989:233). It is further assumed that financial development can be promoted by financial liberalisation, which is alleged to increase saving and therefore investment.
An alternative view on financial structures, financial development and economic development, which is consistent with the theory presented in the previous chapters, is presented in this chapter. In this view, the role of banks in the process of growth is to supply finance, whereas saving and financial markets provide funding. Therefore, from our perspective, the concept of capital market efficiency-which is only applicable to the neoclassical analysis, where the main role of the financial system is to allocate saving between competing investment projects-must be replaced with the new tool to compare and address different financial structures in their roles as promoters of growth. Instead, the concept of capital market functionality is proposed, which has both microeconomic and macroeconomic foundations. Rather than assuming that there is an 'optimal' financial structure, we shall then be in a position to assess and compare different financial structures according to their potential functionality. Having defined the concept of functionality, the main features of two different financial systems, the capital-market-based systems and the credit-based systems, are compared in this chapter. This comparison establishes their relative strengths and shortcomings in supporting.. From theory to evidence
This chapter marks the transition between the theoretical and applied parts of the book. It summarises the story of Brazil's development from 1947 to 1983, concentrating on the relation between real and financial development, with three aims: (1) to justify concentrating on this period, in particular to justify stopping in 1983; (2) to indicate the questions raised by applying the approach of the first four chapters to this period of Brazilian economic experience; (3) to indicate the method of application. The chapter is organised as follows. First we provide an overview of the problems dealt with in the case study and explain the choice of the overall period. The importance of the financial reforms of 1964-6 is highlighted in order to explain the demarcation into two sub-periods, before and after the reform, which is followed in subsequent chapters. Then, we show how the post-Keynesian framework developed earlier will be used to structure the questions to be addressed in subsequent chapters. A SUMMARY OF THE PERIOD AND ITS SUB-PERIODS
In our case study we compare the functionality of Brazil's financial structure before and after the financial reforms of 1964-6. The study deals with the period from 1947 to 1983, which is divided into the periods of 1947-66 and 1967-83. These sub-periods were chosen for reasons concerning both the economic and the financial developments of the period.
The year 1947 is a watershed in Brazil's economic development after the Second World War, because it was then that the first steps to the rapid process of import-substitution were taken by Brazil's government