Credit policies : lessons from East Asia
Directed credit programs were a major
            tool of development in the 1960s and 1970s. In the 1980s,
            their usefulness was reconsidered. Experience in most
            countries showed that they stimulated capital-intensive
            projects, that preferential funds were often (mis)used for
            nonpriority purposes, that a decline in financial discipline
            led to low repayment rates, and that budget deficits
            swelled. Moreover, the programs were hard to remove. But
            Japan and other East Asian countries have long touted the
            merits of focused, well-managed directed credit programs,
            saying they are warranted when there is a significant
            discrepancy between private and social benefits, when
            invesment risk is too high on certain projects, and when
            information problems discourage lending to small and
            medium-size firms. The assumption underlying policy-based
            assistance and other forms of industrial assistance (such as
            lower taxes) is that the main constraint on new or expanding
            enterprises is limited to access to credit. The authors give
            an overview of credit policies in East Asian countries
            (China, Japan, and the Republic of Korea) as well as India,
            and summarize what these countries have learned about
            directed credit programs. Among the lessons: 1) Credit
            programs must small, narrowly focused, and of limited
            duration (with clear sunset provisions); 2) subsidies must
            be low to minimize distortion of incentives as well as the
            tax on financial intermediation that all such programs
            entail; 3) credit programs must be financed by long-term
            funds to prevent inflation and macroeconomic instability,
            recourse to central bank credit should be avoided except in
            the very early stages of development when the central
            bank's assistance can help jump-start economic growth;
            4) they should aim at achieving positive externalities (or
            avoiding negative ones), any help to declining industries
            should include plans for their timely phaseout; 5) they
            should promote industrialization and export orientation in a
            competitive private sector with internationaly competitive
            operations; 6) they should be part of a credible vision of
            economic development that promotes growth with equity and
            should involve a long-term strategy to develop a sound
            financial system; 7) policy based loans should be channeled
            through well-capitalized, administratively capable financial
            institutions, professionally managed by autonomous managers;
            8) they should be based on clear, objective, easily
            monitored criteria; 9) programs should aim for a good
            repayment record and few losses; and 10) they should be
            supported by effective mechanisms for communication and
            consultation between the public and private sectors,
            including the collection and dissemination of basic market information.