Sectoral Investment and Credit Policies

Maxwell J. Fry

Abstract


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 insti┬Čtutions to lend in accordance with
these planning objectives.

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DOI: https://doi.org/10.30541/v17i1pp.66-88

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