Financial Structure, Saving and Growth: Government in the Development Process

Pathbreaking work by Edward Shaw (1973) and Ronald McKinnon (1973) challenged the orthodoxy of the early postwar years that viewed a low interest rate on loans as an essential condition for prosperity in developed economies and growth of less developed economies. At the time they wrote, interest rates in the developed countries had long since been allowed to rise from their wartime levels, but central banks in many developed economies had been slow to permit interest rates or exchange rates to change sufficiently to keep prices stable. In many developing countries the formal financial structure consisted of a central bank, some government development banks and a small number of commercial banks (at times owned or controlled by the government). Capital flows were restricted. Many governments imposed credit allocation at below market interest rates as part of their development plan. Lending and deposit rates changed infrequently. With the rise in world inflation in the late 1960s and 1970s, real interest rates became substantially negative in many developing countries