One of the key constraints to accelerated economic performance in developing countries is the absence of strong, dynamic financial systems. Many if not most Third World financial systems are repressed, primarily as the result of excessive regulation and government interference. Section I of this report presents the argument for privatization and reform of the financial sector, while Section II provides an overview description of the operating components of financial markets in developing countries and assesses the variables that lead to an underdeveloped market. Section III discusses criteria for determining appropriate financial reform and privatization activities. In Section IV, recommendations and a privatization checklist are presented for use by development practitioners involved in financial market development. Section V offers recommended areas for financial policy reform, while Section VI outlines a series of methods and guidelines to privatize financial institutions. The various positive and negative effects of these types of initiatives are examined in Section VII. Case studies of actual privatizations and accompanying policy reforms in seven countries — Bangladesh, Chile, Guinea, Jamaica, Mexico, New Zealand, and the Philippines — are appended, along with comprehensive lists of other financial institution privatizations and of publicly owned financial institutions in countries of interest to A.I.D. (Author abstract, modified)
