Saturday, August 22, 2009
Limitations of Monitary Policy
Now we see the limitations in the ways of effective role of monetary policy in case of developing countries like. Main points about limitations are discussed as under.
1. In case of under-developed countries the money and capital markets are very immature. The banking system is backward and there operates non-monetization in the economy. Above all the major parts of transactions are made with the help of cash, where as the use of cheques and drafts are very limited. The saving schemes are not very attractive. As a result, people are bound to keep their savings in the form of gold and hoardings.
2. There exists a traditional type of banking in the poor countries where banks provide more loans to commerce while reduced loans are given over industrial and agricultural sectors. Perhaps it is due to long period of time and element of uncertainty. If Central Bank inducts cheap money policy for economic development its benefits are mostly availed by speculators a hoarders while the neglected sectors remain deprived of. It shows that easy monetary policy leads to create artificial shortages, regional imbalances and unequal income distribution, rather being helpful in economic development. Thus monetary policy aggravates the problems of developing countries.
3. In case of developing countries the money market is extremely backward. It is fragmented into organized and unorganized money markets. The organized money market is located in cities where bank and specialized institutions provide loans at concessionary rates. While the unorganised money market is located in villages where there is dearth of banks and financial institutions. The Zamindars, money lenders and merchants provide these loans at a higher rate of interest. Above all, the monetary policy will have a least influence over unorganized money market and central bank is pursuing easy monetary policy.
4. In case of poor countries there is limited business regarding stocks, shares and securities. The stock exchanges are confined to few big cities. Central Bank follows a very conservative and orthodox way regarding sale of securities. There is a limited publicity in respect of public loan. The Government security market is neither deep nor elastic. More over, so many financial institutions like co-operative banks etc are least affected by monetary policy. They have them own structure of rate of interest, rigid and inflexible even in the presence of easy monetary policy.
5. In case of under-developed countries the unemployment is not of cyclical nature, which could be removed with easy monetary policy. Rather it is concerned with disguised and under-employment. Accordingly the role of monetary policy is different in under-developed countries. Accordingly there is a need to adjust monetary policy to the circumstances prevailing in the backwards countries. In case of developing countries monetary policy can play its effective role when.
(A) Such a rate of interest structure could come into being which is flexible upward as well as downward. Moreover the benefits of cheap money policy should not be taken away by speculators and hoarders.
(B) If the loans provided under cheap credit money policy are transmitted over to goods sector i.e they are used for speculation a shortage goods will develop. Hence the economy may experience inflation. The inflation will sabotage the process of development. Therefore central bank will have to keep an eye over the speculative demand for money. The loans for unproductive uses will have to be encouraged.
(C) The major part of bank loans is taken away by businessmen while the small traders and agriculturists fail to get the loans. Thus to remove such disparity and proper distribution of loans the central bank should encourage the opening of new banks which could provide loans neglected persons and sectors. Co-operative banking be promoted. As a result not only the savings will increase, but the loan availability will also become possible.
(D) In countries like Pakistan there always exists a danger of inflation. It is because of the reason that outputs cannot be increased to the desirable extent. There is a big population pressure. The government expenditures are far more than government revenues. The trading is carried under speculation and hoarding. In such like circumstances, the selective credit controls are more useful i.e central bank restricts the speculative and consumer credits.
In the light of above mentioned cases if monetary policy is reformulated it can play an effective role in the economic development of developing countries.
About : Raja CRN
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