Abstract

Finance at the Frontier

About ten years ago, J.D. von Pischke, a senior officer at the World Bank, had vigorously attacked the prevailing policies in the field of development finance. His recent book “Finance at the Frontier” is the first comprehensive attempt to rethink and reformulate the former critique, which had been based on purely neoclassical reasoning, and to derive constructive implications for a sound financial sector policy in developing countries from this critique. “The frontier” is the limit beyond which formal financial institutions are unable to provide services to the millions of poor people in the developing world. The book is about the nature of this frontier and ways to shift it outward. Von Pischke’s critique is a forceful as it has ever been. But its theoretical basis as well as its focus have changed. Misdirected regulation per se is no longer regarded as the fundamental reason why almost all development aid efforts in the field of finance have been unsuccessful in recent years. Instead, von Pischke now sees the main factor in the failure of development policy makers and administrators to understand the specific information and incentive problems which make any financial relationship precarious and which are particularly difficult to overcome in the environment of the informal economy of a developing country. This change in the conceptual basis of the critique provides the natural starting point for a very promising new approach to development finance policy