ABSTRACT
This chapter characterizes the financially repressed economy, which is characterized by a lack of organized bank lending to the rural economy and to small-scale urban industry. It presents the main policy prescriptions derived from the so called repressionist view. The chapter discusses the main assumptions of the R. McKinnon and E. Shaw view. One of the most important assumptions of their analysis is the savings effect of higher interest rates, specifically the elasticity of private savings with respect to the interest rate. Another crucial assumption considered by financial liberalization advocates is the likely complementarity between money and physical capital in less developed, fragmented economies. A third assumption of this repressionist paradigm which is not set forth explicitly in the analysis is related to the structure of asset markets in LDC's. Two country-cases are always mentioned among the successful stories of domestic financial liberalization: Taiwan and South Korea.
