Macro Economic Policy & Reality
Theme Paper: “Deepening Rural Financial Markets: Macroeconomic,
Policy and Political Dimensions”
by Claudio Gonzalez-Vega, Director of the OSU Rural Finance Program
Abstract
The purpose of the paper is to examine key features of a macroeconomic
environment conducive to rural financial deepening and to explore
typical difficulties encountered in the political arena for the
adoption of the required macroeconomic framework. It addresses the
consequences on rural financial markets of efforts of macroeconomic
stabilization, structural adjustment, financial liberalization,
and improvements in the framework of prudential regulation and supervision.
It recognizes that favorable macroeconomic policies are a necessary
but not a sufficient condition for expanding the frontier of rural
financial services. It also addresses the new types of challenges
that instability in international financial markets and contagion
through exogenous systemic shocks have created for financial sector
development. The paper builds on recognized lessions from the period
of protectionism-financial repression (1950s-early 1980s) and the
period of financial liberalization (1980s-2000), and it identifies
new challenges for both the authorities and participants in rural
financial markets. The paper identifies renewed political concerns
and the constituencies that influence rural financial policies.
The paper is organized around two changes in perspective that have
taken place in the past decades. There is a new vision about the
role of finance in rural development. Financial services matter,
not as policy tools to pursue non-financial objectives, but on their
own right. There is a new vision about the role of the state in
the promotion and regulation of financial markets. Price (interest
rate) controls and administrative allocations are no longer favored.
Direct production of financial services by the state has also been
questioned. The provision of a physical and institutional infrastructure
to facilitate the smooth operation of markets is, however, indispensable.
Government and donor actions should focus on closing three gap:
an inefficiency gap (potential supply – current achievements),
an insufficiency gap (legitimate demand – potential supply),
and a feasibility gap (political expectations – legitimate
demand). The paper discusses different types of interventions that
are needed to close these gaps. These interventions relate to promoting
the demand and supply of rural finance with non-financial policies
(mostly for the improvement of productive opportunities and reduction
of transaction costs and risk), with financial policies (through
the elimination of financial repression, reduction of barriers to
entry, creation of the required framework of prudential regulation
and supervision), and creation of the necessary institutional infrastructure,
and promotion of innovation in financial technologies and organizations.
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