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Financial Liberalization and Intervention

A New Analysis of Credit Rationing

Santonu Basu

This book seeks to provide a coherent explanation as to why the policies of financial liberalization and financial intervention have been unable to achieve the goal of improving the access of borrowers to the loan market, irrespective of size. This is one of the prime criteria for achieving efficiency in the operation of the loan market and its failure has resulted in increased uncertainty and financial fragility.
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Chapter 6: Intervention II: The Indian Experience

A New Analysis of Credit Rationing

Santonu Basu


6.1 INTRODUCTION The Indian government also intervened in the real sector as well as in the financial sector in order to develop the nation in a similar way to the South Korean government. The reason for the intervention was the same as that described in the previous chapter, and the level of intervention was also comparable to that of the South Korean government. Both countries adopted a five year planning model in order to develop their respective nations. While both countries’ objectives were the same, however, there was a significant difference in the paths they pursued in order to achieve their respective objectives. While South Korea followed the path of an export-led growth strategy,1 India on the other hand adopted an import substitution policy for its development.2 This caused the two economies to differ in a very important way in terms of the priorities they had in place in order to develop their respective nations, and consequently both derived very different results. Adoption of an export-led growth strategy allows a country to avoid the problem of uncertainty (or inadequate market) that arises from the possibility of internal demand deficiency, which in turn arises from the existence of a high poverty rate, as pointed out by Rosenstein-Rodan, Scitovsky and other development theorists. This means the country does not have to address the issue of poverty simultaneously with the issue of industrialization, and industry can achieve economies of scale quickly without addressing the poverty directly, provided it can capture a sufficient...

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