Financial Policy and Efficiency of Resource Utilization in Developing Countries

Abstract

Abstract This study examines the effects of selected policies on economic efficiency in 81 developing countries by pooling cross‐country data over various subperids between 1961–90. An incremental output‐capital ratio is the measure of economic efficiency, while the policy variables include: export orientation, size of the public sector, directed credit program through development bank lendings, financial depth (computed as the ratio of the flow of real value of monetary liabilities to real GDP), inflation rate, real interest rate, and real exchange rate distortion. The export‐orientation, financial depth, and real interest rate are found to promote economic efficiency, while other policy variables are found to hinder it.

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