Pakistan Institute of Development Economics



Sectoral Investment and Credit Policies

The phenomenon of administrative controls designed to segment credit markets is not only widespread in less developed countries, but is prevalent in highly sophisticated forms in most Soviet-type economies.1 The rationale behind these controls lies in the fact that in planned or semi-planned economies investment programmes are prepared as disaggregated sectoral totals, usually broken down further by projects. Monetary policy can be of little assistance in realizing these sectoral plans, but some form of financial planning which relies on segmented credit markets is available for such a task. In particular, manipulation of the financial system by direct controls can be employed in order to direct funds into the planned investment projects and to prevent them from being used to finance unplanned investments. A common way of doing this is to set maximum interest rates below market equilibrium levels and then to ration credit on the basis of the planned priorities. Differential rediscount rates and other incentives can be used to encourage private financial institutions to lend in accordance with these planning objectives.

Maxwell J. Fry

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