in underdeveloped and developing countries many factors hinder the economic growth. the government formulates and implements various policies to remove such hurdles for maintaining equilibrium in the economy. among these policies, with the help of monetary policy the government leads the economy towards economic growth by providing required acceleration. to achieve some definite objectives through monetary policy, the central bank guides the expansion and contraction of the quantity of money and credit towards appropriate direction. that is, the central bank will control inflation and deflation as required through monetary policy.
there will be a great importance of monetary policy in the underdeveloped or developing countries. in such countries, various types of economic problems can be solved through monetary policy. this is because the economy of underdeveloped countries are badly affected by the problems of inflation and deflation. in such a situation, hurdles will occur in the sectors like production, employment, income and economic growth. all these problems in the country can be solved through monetary policy. the importance of monetary policy in the underdeveloped and developing countries can be presented as follows:
1. development of banking and financial institutes
the main objective of monetary policy in underdeveloped and developing countries is to develop banking and financial instituter. in such countries due to lack of banks and financial institutes, the people won't be used to banking. so, all of their income will be used in consumption expenditure. this won't have any encouragement in saving. without saving investment also won't be possible. it is absolutely necessary for the development of such institutes in the country which are requirements through monetary policy. the central bank of the country which is in the from of monetary official develops banks and financial institutes in the country and also frees the public from unnecessary exploitation from creditors charging high rates.
2. monetization of the rural sectors
high percentage of people in underdeveloped countries live in rural sectors. almost all people of these sectors carry out their transactions on the basis of barter system. so,monetary system won't be developed in the rural sectors. monetization of the rural sector through monetary policy will help in the economic growth. monetary policy will help to carry out activities in monetary system by removing the barter system.
3. development of organized money market
in underdeveloped countries there will be lack if organized money market. money market will be controlled by big and rich money-lenders. these classes will exploit general class people. so, the central bank of the country in the form of authorised monetary official can play an effective role in bringing the unorganized money market towards organized money market. for this, by developing appropriate interest rate policy the money market can be made stronger, more effective and improved.
4. price stability
in underdeveloped countries if price remains unstable, then this can be made stable through monetary policy. that is, monetary policy is an important tool for the price stability. this helps in maintaining price stability with appropriate adjustment in demand for and supply of money. if agricultural and industrial production increase during the time of acceleration in economic growth as required by the economy through monetary policy, then demand for money will increase. but contrary to this, if economic growth is low or in a decrease state, then demand for money won't have any positive effect on the economy. in such a situation for price stability the monetary flow should be decreased. so, monetary policy has a great importance in bringing about price stability by controlling inflation and deflation.
5. increase in investment
in underdeveloped countries, the economy is in a backward state due to lack of increase in investment. due to very low income, the marginal propensity to consume of the people is very high. as a result there won't be any saving. investment is not possible without savings. monetary policy will a proper create environment for saving and it also encourages investment in productive sectors. this provides encouragement towards saving by increasing the interest rate and it also provides loan facilities at appropriated interest rate.
6. capital formation
in underdeveloped countries due to low income there won't be saving. due to lack of saving there won't be capital formation which is absolutely necessary for economic development. therefore, the country will be entangled in the "vicious circles of poverty" due to decrease in investment, income and employment. for the economic development of such countries the capital formation should be stressed. this will have multiplier effect in investment, income and saving. for this, monetary policy will help in capital formation by providing loan at low interest rate and increasing investment.
7.appropriate balance of payments
in underdeveloped and developing countries the balance of payment is always in an unbalanced state. the main reason for this is that the export is less than the import. such countries generally export raw materials and import goods made out of those raw materials. through monetary policy, production of export goods is encouraged by providing various subsidies and facilities to such industries production export goods and undertakes the policy of availing foreign exchange to import very essential goods. so, through monetary policy it is tries to create a suitable environment for balance of payment by controlling the foreign exchange rate.
there will be a great importance of monetary policy in the underdeveloped or developing countries. in such countries, various types of economic problems can be solved through monetary policy. this is because the economy of underdeveloped countries are badly affected by the problems of inflation and deflation. in such a situation, hurdles will occur in the sectors like production, employment, income and economic growth. all these problems in the country can be solved through monetary policy. the importance of monetary policy in the underdeveloped and developing countries can be presented as follows:
1. development of banking and financial institutes
the main objective of monetary policy in underdeveloped and developing countries is to develop banking and financial instituter. in such countries due to lack of banks and financial institutes, the people won't be used to banking. so, all of their income will be used in consumption expenditure. this won't have any encouragement in saving. without saving investment also won't be possible. it is absolutely necessary for the development of such institutes in the country which are requirements through monetary policy. the central bank of the country which is in the from of monetary official develops banks and financial institutes in the country and also frees the public from unnecessary exploitation from creditors charging high rates.
2. monetization of the rural sectors
high percentage of people in underdeveloped countries live in rural sectors. almost all people of these sectors carry out their transactions on the basis of barter system. so,monetary system won't be developed in the rural sectors. monetization of the rural sector through monetary policy will help in the economic growth. monetary policy will help to carry out activities in monetary system by removing the barter system.
3. development of organized money market
in underdeveloped countries there will be lack if organized money market. money market will be controlled by big and rich money-lenders. these classes will exploit general class people. so, the central bank of the country in the form of authorised monetary official can play an effective role in bringing the unorganized money market towards organized money market. for this, by developing appropriate interest rate policy the money market can be made stronger, more effective and improved.
4. price stability
in underdeveloped countries if price remains unstable, then this can be made stable through monetary policy. that is, monetary policy is an important tool for the price stability. this helps in maintaining price stability with appropriate adjustment in demand for and supply of money. if agricultural and industrial production increase during the time of acceleration in economic growth as required by the economy through monetary policy, then demand for money will increase. but contrary to this, if economic growth is low or in a decrease state, then demand for money won't have any positive effect on the economy. in such a situation for price stability the monetary flow should be decreased. so, monetary policy has a great importance in bringing about price stability by controlling inflation and deflation.
5. increase in investment
in underdeveloped countries, the economy is in a backward state due to lack of increase in investment. due to very low income, the marginal propensity to consume of the people is very high. as a result there won't be any saving. investment is not possible without savings. monetary policy will a proper create environment for saving and it also encourages investment in productive sectors. this provides encouragement towards saving by increasing the interest rate and it also provides loan facilities at appropriated interest rate.
6. capital formation
in underdeveloped countries due to low income there won't be saving. due to lack of saving there won't be capital formation which is absolutely necessary for economic development. therefore, the country will be entangled in the "vicious circles of poverty" due to decrease in investment, income and employment. for the economic development of such countries the capital formation should be stressed. this will have multiplier effect in investment, income and saving. for this, monetary policy will help in capital formation by providing loan at low interest rate and increasing investment.
7.appropriate balance of payments
in underdeveloped and developing countries the balance of payment is always in an unbalanced state. the main reason for this is that the export is less than the import. such countries generally export raw materials and import goods made out of those raw materials. through monetary policy, production of export goods is encouraged by providing various subsidies and facilities to such industries production export goods and undertakes the policy of availing foreign exchange to import very essential goods. so, through monetary policy it is tries to create a suitable environment for balance of payment by controlling the foreign exchange rate.
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