Extract

2. Savings and financial sector development: assessing the evidence George Mavrotas* 1. INTRODUCTION The relationship between financial sector development and economic development has been the subject of a booming literature in recent years.1 However the relationship between savings mobilization and financial sector development has received less attention.2 The lack of financial intermediation in developing countries is widely evidenced by the mismatch between institutional savings and investment. The need for investment is indisputable, and in the past it has been addressed through structural adjustment programmes, such as the introduction of development finance institutions and other such vehicles, which provide credit at below market rates for the purchase of capital. Many policies introduced into developing countries by donors, such as concessionary discount facilities in central banks, high reserve requirements and extensive use of specific credit programmes have discouraged deposit mobilization: the numerous small savers that exist, even in the poorest sectors of the least developed economies, have been overlooked as a potential source of internal funds. This is due to the fact that it is far easier for governments to accept donor funds than to mobilize the savings of its population, even though the latter method may, in total, provide more credit for fixed capital formation than the former (Mavrotas and Kelly, 2001a).The above clearly suggests the need for further research on this important issue. What developing countries often lack is an appropriate financial sector, which could provide incentives for individuals to save, and acts as an efficient intermediary...