Finance in developing countries

This issue of the Journal is devoted to papers dealing with various features of the financial process in developing countries. Although the field of finance has tended to be a neglected branch of development studies, there has recently been an upsurge of interest in this area stimulated, in large part, by the publication in 1973 of the influential books by McKinnon and Shaw. This interest is reflected in the increased number of papers concerned with finance which have been received by the Journal since 1973. Some of these papers, as well as some specially solicited, are presented here to provide an indication of the wide range of work currently in progress.
While the majority of papers included deal with various aspects of the domestic financial system, a paper is included which lies in the field of international finance and there are two papers within the field of public finance as conventionally defined. It will be seen, therefore, that the concept of finance has been broadly interpreted. The justification for this lies in the fact that it is often very misleading to treat money, taxation and international finance in separate compartments for, as both McKinnon and Shaw stress, the workings of domestic banking and financial systems, tax policy and international financial aspects of development are very closely interrelated, with policy choices in one area having implications for feasible choices in other areas.

This interrelation is perhaps nowhere more clearly demonstrated than in the analysis of the effects of inflation. It has long been realised that inflation acts as a particular kind of tax, with money balances serving as the tax base. At the margin, therefore, monetary expansion can be considered a substitute for other forms of taxation and there is no a priori reason for believing that it is necessarily more inefficient or distributionally objectionable to tax money balances than to tax commodities, land or labour.