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Monetary and exchange system reforms in China since the beginning of economic reform in late 1978 emphasized institution building in general and institutional and market development in the foreign exchange system and the capital market in particular.1 The development of nationally integrated money markets—that is, markets for short-term funds—is becoming a priority. This would enhance the effectiveness of monetary policy, support the capital markets in providing liquidity and funding for portfolios, and allow further progress in the operation of the foreign exchange market. Inherently related to all aspects of money market development is interest rate liberalization, an area where reforms are also lagging in China. Moreover, achievements in reforming the foreign exchange system—the exchange rate was unified as of January 1, 1994, and much progress was accomplished toward convertibility of the renminbi—make domestic interest rate flexibility highly desirable as a tool to support the exchange rate.



The Korean government launched a series of Economic Development Plans since the early 1960s aimed at growth and employment creation. During the early stage of economic development, when domestic savings were totally inadequate to meet the ambitious investment requirements, the government intervened extensively in mobilizing and allocating scarce financial resources to strategically important sectors in order to carry out the Plans. In this process, to facilitate systematic control of the financial sector by the government, commercial banks became de facto public enterprises, and various specialized banks such as the Industrial Bank of Korea and the Korea Exchange Bank were established. Moreover, a wide-ranging scheme of policy loans was introduced for the purpose of allocating the limited financial resources preferentially to specific industries and economic sectors with favorable provisions as to availability and cost.



During the past two decades the Italian financial system has undergone extensive structural change. As in many other countries, a number of regulatory revisions have enhanced the role of markets in allocating financial resources and transmitting monetary policy. In the field of banking, the reforms have helped engender more competitive deposit, credit, and interbank markets. It is in this framework that Italy’s experience with interest rate liberalization and interbank market development should be considered.



Over the past ten years, Thailand’s financial system has progressed tremendously in terms of size and efficiency. The financial sector has grown by an average of 19.2 percent a year in real terms, compared with 8.9 percent a year for the whole economy. Competition among financial institutions has also risen markedly. Consequently, the financial system’s ability to mobilize domestic savings and to finance economic development has accelerated. Much of Thailand’s financial success can be attributed to the sustainable economic boom and the authorities’ program of financial liberalization and development. This paper describes and evaluates that program, with an emphasis on interest rate liberalization and money market development.



Until the end of the 1970s, successive Turkish governments pursued an inward-oriented growth strategy. However, changes in the world economic conditions after the mid-1970s and the domestic economic crisis that followed forced the authorities to review and eventually abandon the traditional economic policies. In 1980, the government launched a structural adjustment program that was based on free market principles and an outward approach to economic policies. During the period 1981–1991, a series of liberalization measures were started, as were institutional changes to implement the new economic strategy. Although the focus of this paper is on interest rate liberalization within the context of a general financial sector reform, the process started with reforms of the foreign trade sector, both exports and imports. The liberalization of trade and the concomitant increase in the volume of foreign transactions played an instrumental role in the design and implementation of financial sector reforms.



Over the past three decades, the Malaysian economy has achieved annual GDP growth averaging about 7 percent, placing the country in the category of fast-growing Southeast Asian economies. This rapid growth has coincided with a major shift in the structure of the economy from one highly dependent on a small group of primary commodities to one in which manufacturing is the largest sector. Growth has been supported by a rise in the investment rate from an average of 14 percent of GDP in the 1960s to 33 percent in 1990. This increase was facilitated by the growing openness of Malaysia’s economy, since much of the investment came from abroad and was concentrated in export-oriented activities, and in particular a move toward financial liberalization.



In 1994, a series of policy measures in relation to China’s financial reforms were successfully implemented. The most important of these were the unification of the exchange rate, the transformation of the functioning of the People’s Bank of China (PBC), and the establishment of policy banks.1 However, the existing interest rate system was not modified. In contrast with the experience of most developing countries, interest rate liberalization in China will be the last item on the reform agenda, after the liberalization of the exchange rate and the opening of a securities market, reflecting the Chinese pattern of gradual financial reform. The reasons for delaying interest rate liberalization are not only some technical difficulties, but also different views on its sequencing and on the risks involved.



China’s interbank market has begun to take shape since it was initiated in the mid-1980s. However, it still has a long way to go by comparison with interbank markets of the developed countries. It is still unable to meet the requirements for uniform, orderly, and highly efficient fund-raising in China’s socialist market economy. Therefore, we have developed a basic outline for a national interbank market in renminbi based on the experiences of Japan, Italy, and Turkey, while taking into account the Chinese reality.

Zoran Hodjera

IN ASSESSING THE STRENGTH of a country’s balance of payments and reserve position, it is generally not sufficient merely to take into account gains and losses of reserves over a past period. Prospective developments of the country’s balance of payments must be evaluated as well, which means that some projection, however informal its methodology may be, of the country’s balance of payments must be attempted. In making such assessment it has been found convenient to pay particular attention to those balance of payments components that tend to change only gradually in response to the relatively slow adjustment in the economic and financial structure of the country and of its trading partners to domestic developments or to policy measures designed to reduce balance of payments deficits or surpluses. Other components that are apt to change rapidly in response to more transitory stimuli, such as the effect of various instruments of monetary policy on short-term capital flows, changes in expectations wtih regard to spot and forward exchange rates or to the par value of the currency, and temporary financing or other disturbances, are considered less significant for longer term prospects.

Mr. Marco Arnone, Bernard J. Laurens, Jean-François Segalotto, and Mr. Martin Sommer

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies.