Development Research and Policy Analysis Division
High-Level Regional Consultative Meeting
on Financing for Development
Asia and Pacific Region
Jakarta, 2-5 August 2000
Session I: Financing for Development: Issues in domestic resources
mobilization in the Asia-Pacific context
(substantively serviced by ESCAP)
A. Public mobilization of domestic resources: the major issues facing countries of the region
The principal sources of domestic finance for a government are taxes, non-tax revenues and public borrowings.
Issues in tax policy
Given the importance of the informal non-registered sector in most economies of the region, the difficulties of assessing both land and income taxes, and the lack of a culture of paying taxes even when assessed, most governments are facing difficulties in increasing revenues, despite considerable efforts to improve tax administration. The issues that then arise are:
- Is there an optimal level of taxation in an economy?
- How can the expenditure of tax revenues for productive uses be ensured?
- What steps can improve the efficiency of tax assessment and collection?
- With the emerging consensus on a reduction and simplification of income, profit and trade-related taxes and a greater resort to value added taxes, how can a government reconcile the objectives of revenue productivity, allocative efficiency, simplicity and horizontal as well as vertical equity?
Issues in non-tax revenue
When taxes are difficult to collect, governments resort to non-tax revenue generation. However these methods raise issues in themselves. For example:
- To what extent is it feasible or desirable to increase government revenues by levying or increasing prices of goods and services supplied by government?
- Is privatization of state enterprises really a means of enhancing government revenues or is this a temporary illusory gain?
- Why should a government sell off profit-making state enterprises?
- Shouldn't governments be taking more initiatives in areas where action can be taken without increasing revenue liabilities? For example, can regulatory systems be run on the basis on contributions from those being regulated?
Issues in public borrowing
Most governments resort to borrowing from the domestic financial market. Such borrowing raises a number of questions: including:
- What are the implications of public borrowing for macroeconomic stability?
- Does a significant level of public borrowing crowd out private investment?
- Is some public borrowing needed to provide a source of benchmarks for private capital market pricing?
- Are there good reasons for preferring domestic debt to foreign debt?
B. Mobilization of private domestic resources
The role of monetary and fiscal policies (including tax and other incentives)
Fiscal and monetary policies often actively used to encourage private savings and investment.
- Is this a valid role for these government policies?
The role of the banking system
The central role of banking system in mobilization of resources for investment raises a number of
- Should banks be public and/or private?
- How does a government influence the banks' size and direction of provision of loans
to the private sector in order to meet its development objectives?
- During a period of restructuring, how can a government encourage banks to continue
to lend without affecting their financial soundness?
The role of other capital markets
Stock markets are inherently limited as a means of raising capital for enterprises. Some countries
have tried alternatives such as mutual fund placements, bond markets, venture capital funds and
commodity futures markets.
- What are the most viable means that the domestic private sector can use to raise funds
locally beyond bank loans?
- What can or should governments do to encourage the use of these other instruments?
Regulatory frameworks for the financial sector
One of the well-known weaknesses of the financial sectors in the region is the underdeveloped state
of regulation and supervision.
- What is the optimum division of responsibility between the government, the central
bank and other regulatory bodies, including those involved in self-regulation?
- How should the countries integrate the international norms being developed for
banks, stock markets, accounting and auditing etc into their national
- What are the major implications pf the Asian crisis for the above?
- How are the related human resource development needs being tackled?
C. Implications of institutions for raising domestic resources to support
A society's rules of the game: Formal and informal institutions for mobilization and
allocation of resources
The rules of the game in a society (the humanly devised constraints that shape human interaction)
include formal institutions such as rules and regulations, and informal institutions such as conventions
and codes of behaviour. Efficiency in the mobilization and allocation of a country's resources is
largely determined by its rules of the game, and by the fairness and transparency of these rules. The
rules are fair when every economic agent enjoys an equal opportunity ex ante and its ability, efforts,
and performances are evaluated by the same standard ex post. They are transparent when the rules
are known to all economic agents or a way of knowing them is open to them. One important role of
the government is to establish fair and transparent rules of the game in all sectors of the economy.
Lessons from the Asian financial crisis
There is a view that under the prevailing rules of the game in most of Asia, banks and other financial
service providers did not feel the need to acquire, and have not acquired, the capacity to provide the
basic functions that a financial sector is supposed to provide for a well functioning economy. Also
the thoughts and practices regarding the role of the government and the nature of financial
intermediation are seen to be based on managing the process, rather than on providing a conducive
environment for the private financial sector to flourish. Thus there is a perceived need to change the
basic institutional approach if Asia is to revitalize.
- What kinds of initiatives are thus necessary?
- Are they feasible?
- What are their human resource and other implications?
D. Development objectives and financing options: lessons from recent
How the crisis has altered the modalities used by the government for interacting with the
The recent crisis has left governments in a weakened state, but more so their domestic firms and
SMEs. The latter are suffering from a credit crunch, are often unable to repay their loans and require
restructuring to be viable entities.
- How do governments envisage to encourage the resurgence of their domestic
- What techniques are they employing to meet their stated development
objectives of reduced poverty and enhanced growth with improved social
services and social development, protection of the environment etc.?
Trade-offs between domestic and foreign sources of finance
One of the major questions facing governments today is how much freedom they should allow
themselves and their state enterprises as well as their domestic industries to borrow abroad, how to
keep account of who owes what and to whom. In this regard:
- Should a government impose limits on the foreign borrowing of various actors
or rely on market forces to achieve its objectives?
- How far should a government go to encourage an increase in domestic savings
and develop local financial markets?
- Should a government encourage foreign participation in its domestic markets,
for example, as owners of banks or as players in the capital markets,
and within what parameters?
Possibilities for regional cooperation
There are a few areas where enhanced cooperation among countries in the region could make a positive
contribution to an increased mobilization of resources. These include:
- The instituting of double taxation treaties
- The harmonization of incentives for investment, particularly foreign
- The encouragement of growth zones of various sorts
- The enhancement of regional or subregional macroeconomic monitoring and
surveillance including the use of peer pressure
What are the preconditions and prospects for strengthening regional cooperation in the