Macroeconomic Environment and Financial Reform

Several developing countries have been persuaded by the new orthodoxy of financial reform. This orthodoxy states that policies that allowed domestic interest rates to attain their true equilibrium level and credit, to be allocated on the basis of viability and productivity of business enterprises or projects, would enhance economic’ growth. However, the initial foray into financial reform during the 1970s and 1980s appeared to have succeeded in only a few of these countries. The relative failure of this new orthodoxy has, therefore, reopened the debate about the design and soundness of financial reform policies and the effect of these policies on developing countries’ financial markets. It is true that the impact of financial reform on a country’s financial markets depends on the principal components of the reform program, the methods used to implement the reform policies, and the interaction of these policies with the country’s macroeconomic environment. The reform policies may themselves be well designed and sound, but they may fail to accomplish their intended objectives in the absence of an appropriate macroeconomic environment.