International Encyclopedia of Public Policy and Administration - Vol. 2

By Jay M. Shafritz | Go to book overview

owned banks and nonbank institutions in many countries ( Australia, Malaysia, and Indonesia, for example), the securities scams in India in 1993, and substantial losses resulting from derivatives speculation, leading to the collapse of the Barings Bank in 1995. Since failures are ultimately borne by smaller savers and taxpayers, calls for reregulation of the finance industry by governments resulted.

It is now generally accepted that regulation by quantitative controls is ineffective against capital movement and is expensive to implement. Emphasis is now being placed on prescribing disclosure and reporting requirements to keep markets continuously informed. A continuing tension in financial regulation is to strike the right balance between the freedom financial institutions require to compete in a global market with the need to maintain domestic and overseas confidence in the stability and consistency of an economy.


International Trends in Financial Regulation

Since the end of World War II, the massive transfers of capital from developed to developing countries through private, public (government to government), and international organizations, such as the World Bank and the International Monetary Fund, have created a need for international financial regulatory structures. The gradual removal of barriers to world trade through the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), combined with the use of instantaneous electronic communications for movement of funds, have made borderless economies a reality, but regulation has remained a national concern. Various organizations and groups have emerged out of the successive crises in order to deal with international regulation, including the Paris Club of major lending nations (or, Group of Ten), the international clearing houses, and the International Institute of Finance (IIF). Credit ratings have also been extended to sovereign nations and states.

Financial regulation measures can no longer be developed in sovereign isolation. On one hand, a financial climate caused by excessive regulation that is deemed unfavorable can lead to capital flight from one jurisdiction to another. On the other hand, insufficient or lax financial regulation can be a real deterrent to many potential lenders and investors, necessitating a substantial reregulation reform, such as that undertaken by Hong Kong in the late 1980s. Finding the balance between sufficient regulation of finance markets to engender confidence and protect national interests while not deterring foreign investment is a critical issue for governments of developing countries. It is made more difficult where domestic institutions and stock exchanges are new and small. A further constraint in developing countries is often the lack of resources or political resolve to implement an efficient regulatory framework.


Conclusion

The type and extent of financial regulation required will depend on the state of the development of the economy and the resources available to enforce regulations. The lessons learned from successive financial collapses are usually forgotten quickly by investors, and rapidly changing technology and techniques of financial markets plus the internationalization of transactions mean that the rules require constant updating and review for relevance. According to the World Bank ( 1990), "A main concern of financial regulation has been the achievement of stability without undermining efficiency. But finance remains a dynamic field, changing far too rapidly to achieve a perfect balance between the freedom needed to stimulate competition and growth and the control needed to prevent fraud and instability."

GRAEME MACMILLAN


BIBLIOGRAPHY

George, Susan, 1994. A Fate Worse Than Debt, London: Penguin.

Jackson, Peter, and Catherine Price, 1994. Privatisation and Regulation: A Review of the Issues. London: Longman.

Vittas, Dimitri, ed., 1992. Financial Regulation: Changing the Rules of the Game. Washington, DC: World Bank, EDI Development Studies.

World Bank, 1990. Financial Systems and Development (The 1989 World Development Report). Washington, DC: World Bank PRE, Policy and Research Series.

FISCAL EQUALIZATION, METROPOLITAN . Programs designed to share tax base and revenues to create a more equal distribution of (1) the fiscal capacity of local governments, and (2) the tax obligations of citizens and businesses for the costs of local government within a region (a.k.a. Metropolitan Tax Base Sharing, Metropolitan Revenue Sharing).


Background

The need for metropolitan fiscal equalization is based on the economic problems of central cities. Often, cities with many lower-income people must increase taxes for all businesses and households to pay for public services (Ladd and Yinger 1989). This change can create incentives for businesses and affluent citizens to relocate to lowertaxed jurisdictions. For example, suppose central cities, in need of resources, raise taxes; this increase discourages new development and makes relocation an economic necessity for many businesses and residents. If central cities do not raise taxes, then necessary services might not be produced. These pressures force central cities to seek resources from federal and state governments or the surrounding region.

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International Encyclopedia of Public Policy and Administration - Vol. 2
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