Financial reform and marginal clientele in developing countries

It first surveys the increasingly ambitious attempts at reform inspired by the failure of the old interventionist and protectionist strategies of development. According to the paper, the role of government has shifted from controlling financial prices and amounts to preserving macroeconomic stability and financial system solvency. However, financial reform, while necessary, is not alone a sufficient condition for increased access to financial services by marginal clientele; lack of access is due far less to market failure than to incomplete organization and limited institutional and physical infrastructure. It was the belief that observed patterns of interest rates and limited access to formal credit in rural financial markets were due to market failure that led to the incorrect design and eventual failure of most small farmer credit programs -- the main flaws of which were a generalized lack of concern for risk and for institutional viability. In addition to new policies and institutional design, however, financial innovations will also be required. Local financial institutions may become sources of innovation, but cannot reduce systematic risk sufficiently. The development of financial market systems and networks will be needed to overcome the limitations of local intermediaries, both in a micro and a macroeconomic sense. (Author abstract)