Question

“Much of the rationale for liberalizing financial markets is based neither on a sound understanding of how these markets work nor on the potential scope for government intervention” (Joseph Stiglitz, cited in Todaro and Smith, 2011, p. 729).

1. (a) In the context of development priorities, what are the relative roles of central Banks, commercial banks, development banks, informal and unorganized sources of credit, and microfinance such as the Grameen Bank of Bangladesh?
2. (b) Discuss the seven market failures that, Stiglitz and his colleagues say, justify a strong government role in developing-country financial sectors. Do you agree with this assessment? Explain.

Answer 1

Page @ Role of banics in development The banking system plays a very impostant cele J it Collects the savings and lends them out to businesses and menu bestilles. Had leholk in investment, Creation of Capital in the clonomy & banky play a important bele in creation of new capital in a country, which helling grolith eleconomy. Industrial banks, help the formation of new companies and new industries Lotustrial banks povidkor lorg temo learne. Banks Cam breate money instantly with Frictional reusene bemking system, which play very imp sole. 1 Bank Arrovides guarantees on beheytt of their customers, which forms the basis of internationel sacle. Banics also help in foreign exchange фа аллаblу пр. — Bonk ako act as advisors, agents of businesses, help in denelopment o trade and e industry.

Date Page mkommal and energani zeel forno com os credit are not motivated as there are various problems associated with it. But they also act as a important credit souxe in the economy. ! Farness, tradess still opt to take Loure from unorganized sector because there is nory less paper work and technicalities invowed. come unosgersized credit sources Chevage nominal Reite of interest and do not exploit the bonower. thats why the their eale is also very imp. a Kiemefinance inyetitions are the bands that provide loom to Rusal and urban populations, mostly be leusal population. Loans are given without any collettsal Small Credits is very cost effective weapon to fight poverty and H 0 terves as a fato efst in the over all deve tepment of socio economic Conditions of the poor who have been kept Cuttiele the banking system.

(6) Seven Market failures (1) Monitoring as a public good. Information about the Solanscycie ability of from to pay its lebts) of finanult o institefion and information about the management of these υλοβργο. Huis infomation can foc provided whes government intervenes in the Financial marketti (i) Externalities of Monitoring, selection lending. and duese are vamous epterabes wutus markets. For eg. Innestos might home infesselt information. When bank fail, innessors may feed that other bants will also fail so they withdraw their fonde! A large number of bed firms when take toone, it becomes difficult for good frone to take credit because nuestors can't differentiate between the huo. So government intervention is required now adays, nesy big fimy herme alivesitieel

ownership, which also makes monitoring difficult (IV) é o temalities of financial disruption Financial diskuption, is when a bank of multiple blanks go bankrupt / Fail. acevorment cant sit idle, it has to intervene, hemosment nettory reale of insures. Conerment does its best to mes me the bank as a bank failing has many reeper wisions on Saners, lendess, bornouoss, etc. ( listing and incomplete maslett Equity markets are weak in many countries Belante equity markets also come with thare uisks and individuals are lusk anerse so they dont invest in Сам тоа kе p. 1. 4 yazlu Qи до working well. I Gout needs to step in and reegulate the maskelt in weh a way that people ondesstand equity markets and innest in them.

Page () Omporfelt compiblbon A Customer who has a long track wecord with one bank is niewed as a good loom mespect by that bank, may be unknown to another bank amelto be considered as riskier prospect. Thos, n i a enen if there are ten deneless supplying Loankin mamicet does not mean that Customer has a Choice of ten suppliess. I Competition is not perfect, enest if there as many banks. Jo gongument intervention is de quilled to clear this issue of imperfect Competition. Pasenoinffeciescy of competentne maskelty. Two main assumptions in welfare economics are in - Maskets should be complete - Information must be epogenoudhe To not affected by any action a partici to point I in a market takes. Both oth mphion are disturbing in Case of financial mascette W

Page Gathering informatron is one of ettenhay I functions of financial market sharin O and pars fering the risk is another important a function. Many leisks uem ain Unisored, which makes finemcial markets incomplete When information is endogenous or market in complete the economy is not at nasto optimal level. Gonemment interventions as requiered to take into account the cost of information and of establishing markets that can make all indivil duals better off. uninformed in investors. what happens when individuals have information but do not process it o correctly What happens when lenders disclores the teme of Contract accurately but Connumero Can distinguish behneen compound or simple interest some of the discloure llequirements imposed by the government designed to make his that firme do not take advantage of oningenmed conales Vw
Yes, definately one has to agree with the assessment that Stiglitz has made, justifying the reasons for the intervention of government in the financial markets. Financial markets act as a backbone to the economy, and it is always better for the economy when the financial markets are in strong health and are have a very sound structure.
7 reasons why government must intervene in the financial markets are in the images, mainly to rule out the market failures caused in financial markets due to various reasons.

( Market failure is a situation when the allocation of goods / services is not at socially optimal level due to various reasons )