A Test of the Controversial Assumptions in the McKinnon-Shaw Hypothesis versus Neo-Structuralist Propositions : An Empirical Test From a Field Survey in the Congo

Abstract

This paper attempts to shed light on the efficiency/effectiveness issues of informal financial markets and the pattern of portfolio allocation shift in response to change in interest rate, in the process of financial liberalization. The two issues have been both controversial and hotly debated between proponents of the McKinnon-Shaw liberalization and Neo-structuralist economists. To examine whether interest rate changes are associated with the former or the latter view in the Congo we resort to a survey of household portfolio behavior in informal finance. Survey results suggest that informal finance is relatively effective in intermediating funds and providing financial services and access. In addition, the portfolio pattern indicates that households shift resource more from informal loan to deposits than from cash. These results provide some support for the Neostructuralists’argument; rejecting thus the McKinnon-Shaw argument that higher bank interest rates would generally increase investment.