Person:

Rosengard, Jay

The total amount of development finance generated by Vietnam has been exceptionally high from all significant sources using all standard measures of comparison. However, there are many potential unintended consequences of Vietnam’s successful resource mobilization, with significant implications for the future financing of development. There are several steps the government can take to mitigate these risks. The principal vulnerabilities created by Vietnam’s mobilization of substantial resources for development finance fall into two main categories: threats to macroeconomic stability caused by imbalances in the composition of funding; and risks for microeconomic management arising from imprudent financing structures. The most serious macroeconomic threats are: public sector funds crowding out both access to and utilization of private sector funds; overleveraging of insufficient equity for unsustainable levels of debt; financial exclusion of low-income households and family enterprises; and flight of hot capital. The most serious microeconomic risks are: maturity risk from over-reliance on short-term financing for long-term investments; foreign exchange risk from over-use of foreign capital for investments in non-tradable goods; credit risk from debt-financed speculation in asset bubbles; and fiscal gap risk from public sector dependence on unsustainable revenue sources. The suggested ways of mitigating these vulnerabilities include: further deregulation and liberalization of the banking sector, coupled with government disengagement from commercial financing; further development of equity markets and more rigorous enforcement of prudential norms; further development of microfinance institutions, products, and delivery systems; introduction of market-based instruments to manage FPI speculative outflows, together with more effective monitoring of the private sector’s external debt; further development of domestic long-term debt instruments; better coordination of monetary and fiscal policy; and continued implementation of comprehensive tax reform.

Indonesia’s financial sector has two paradoxes: 1) Indonesia has been a global leader in microfinance for the past 25 years, but access to microfinance services is declining; and 2) Indonesia’s commercial banks are liquid, solvent, and profitable, and the Indonesian economy has been doing well over the past decade, but small and medium enterprises are facing a credit crunch. Although Indonesia is underbanked, most commercial banks have been unresponsive to unmet effective demand. The behavior of banks has been in their own short-term best interests, primarily because of the unintended consequences of Indonesia’s financial sector reregulation after the East Asian crisis and contradictory monetary policies, which have produced a prudentially sound but inefficient, narrow, and homogenized banking oligopoly. Indonesia should not respond to financial exclusion by artificially pumping out and administratively allocating more credit. Instead, it should promulgate smart regulation so that banks maintain their sound risk management without pursuing non-competitive and non-inclusive business practices.

The Handbook of Microfinance showcases an expansive collection of works from leading academics and field practitioners. In an attempt to understand the enormous gap between the limited number of clients that are currently benefiting from microfinance services, and the huge number of potential clients that are not, the selected contributions in this comprehensive handbook have one common thread: the prevailing mismatch between demand by clients of microfinance institutions and potential clients selecting themselves out for their demand for a wider array of financial products which is not being met. The scope of the book is wide, and explores successes and failures, main challenges and debates, methodologies for impact evaluation via random trials, leading trends in Asia versus Latin America, main efforts in Africa, the importance of value chains in Central America, ethical and gender issues, savings, microinsurance, governance, commercialization trends and the potential advantages and disadvantages of it. This exhaustive Handbook also features main lessons from informal finance and 19th-century credit cooperatives addressing the above-mentioned mismatch.

The dilemma is real and profound: most countries have a property tax, but few of their citizens like the tax. The property tax is the tax everyone loves to hate. Countries can seldom live with the tax as initially designed, yet neither can they live without the tax at all. Thus, this chapter focuses on the reform of an existing system of property taxation rather than on the creation of an optimal property tax. Leaders seldom have the opportunity to design a property tax with a blank slate. There is usually already some sort of system of taxing land and buildings, with a variety of established special interests and a political, social, and historical context. The challenge is to make an existing property tax less taxing.