A. Public mobilization of domestic resources: the major issues facing countries of the region

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

• 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

• 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 crucial issues:

• 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 regulatory frameworks?
• 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 development efforts

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 experience

How the crisis has altered the modalities used by the government for interacting with the private sector?

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 industries?
• 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 investment
• 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 above areas?