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two fronts government intervention was seen as a powerftil answer and the newly
independent
countries adopted interventionist policies.
(i) Market imnerfection/fai
lure: Stem (1991) developed a taxonomy of
reasons
29 for market failures in developing countries. As for the financial sector, in
the early post independence
era, it was largely dominated by commercial banks and
there was very little presence of non-bank financial institutions. The banks
themselves were in most cases foreign-owned, with branches in the main towns only,
and they supplied only short-term commercial and trade credit. They provided long-
term credit almost exclusively to foreign-owned natural resources industries and
failed to support the modernisation of agriculture and industrialisation. Further,
because of the oligopolistic structure of the banking industry, the market determined
rates tended to be rather high. Markets were also deficient in the provision of
information and access to credit by local enterprises. This favoured the existence of
an indigenous money market 30 providing basically short-term loans to farmers and
small businesses. Wai (1977) also observes that while in the 1950s the unorganised
money markets in most developing countries were larger than the organised ones this
pattern had changed in the 1970s. Wai reported that 55-60% of demand for non-
institutional credit was for purely productive purposes. The role of the unofficial
money market in developing countries will be examined in Chapter 3 when
considering the arguments of the "New Structural ists".
29 e-g externalities, monopolistic/oligopolistic competition, increasing returns to scale, acute
informational problems , concern about improving the allocation of resources.
30 Made up of money lenders, traders, pawnbrokers.
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