MIBEThe economics of emerging economies

The role of Finance in economicThe role of Finance in economic

development and the emerging development and the emerging economieseconomies

Gianni Vaggi

University of Pavia

April, 2014

MIBEThe economics of emerging economies

The role of Finance in economicThe role of Finance in economic

development and the emerging economiesdevelopment and the emerging economies

Finance 1-1Finance 1-1

Different financial flows and the Balance of Payments

Introduction:Introduction:

The rich and the poorThe rich and the poor

Countries with more than 100 million people, 2011 (World Development Indicators 2013)

India 1.241

United States 311

Indonesia 242

Brazil 196

Pakistan 176

China 1.344

Nigeria 162

Bangladesh 150

Russian Federation 143

Japan 127

Mexico 114

Population Density

Population, millions

World Bank income groupsGNI per capita 2012, WDI 2014

Low $ 1,035 or less

Lower middle $ 1,026 – 4,085

Upper middle $ 4,085 – 12,616

High $ 12,616 or more

PartPart 1 1

Economic growth and Economic growth and capital accumulationcapital accumulation

GDP Growth rates

-30

-20

-10

0

10

20

30

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

China

Korea, Rep.

Mexico

Brazil

South Africa

Vietnam

Malaysia

BRICS Capital accumulation

The engine for growth-1

The role of the governments:– Policies ensuring macroeconomic stability– Government and financial markets– Policies promoting equality(education, land

reform)

The engine for growth-2

•The profit-saving-investment nexus

•Industrial policies (promoting accumulation of physical and human capital)

•activities (altering the allocation of resources) Export promotion-SEZ

Part 2Part 2

What if a country does not have What if a country does not have its own capital to accumulate?its own capital to accumulate?

Financing DevelopmentFinancing Development

Private

•FDIs

•Workers’ remittances

•Portfolio Investment

•Stocks

•Bonds

•Loans

•NGOs

Public-ODA

•Bilateral

•Multilateral

•Technical assistance

•Concessional loans

•Grants

•Debt cancellation

Non debt

Debt

Total net resource flows to developing countries, by type of flow, 1990-2016f (Billions of Dollars)

1. AID THROUGH NGOS

2. OFFICIAL DEVELOPMENT ASSISTANCE

3. PORTFOLIO INVESTMENTS

4. FOREIGN DIRECT INVESTEMENTS

5. REMITTANCES

Short Memo about:

1-NGOs1-NGOs

Represent specific local and international Represent specific local and international interest groups concerninginterest groups concerning

• Emergency reliefEmergency relief

• Child healthChild health

• Women’s rightsWomen’s rights

• Alleviating povertyAlleviating poverty

• Increasing food productionIncreasing food production

NGOs; PROs and NGOs; PROs and ConsConsPROs PROs • Less constrained by political imperativesLess constrained by political imperatives

• Strength at local levelsStrength at local levels

ConsCons• Small projectsSmall projects

• Short-medium term projectsShort-medium term projects

2-Foreign Aid, ODA2-Foreign Aid, ODA

DEF.DEF. Any flow of capital to LDCsAny flow of capital to LDCs

• Its objective should be Its objective should be nonnon commercialcommercial from the point of view of the donorfrom the point of view of the donor

• It should be characterized by It should be characterized by concessional concessional termsterms (i.e. i and repayment period for (i.e. i and repayment period for borrowed capital less stringent then borrowed capital less stringent then commercial terms)commercial terms)

Aid can be tiedAid can be tied

• By SOURCE By SOURCE

(loans or grants have to be spent on the (loans or grants have to be spent on the purchase of donor-country goods and purchase of donor-country goods and service)service)

• By PROJECTBy PROJECT

funds can only be used for a specific funds can only be used for a specific projectproject

Aid AllocationAid Allocation

Rarely determined by relative needs of DCs. Rarely determined by relative needs of DCs. Most bilateral aid seems unrelated to Most bilateral aid seems unrelated to development priorities and are based development priorities and are based largely on POLITICAL or largely on POLITICAL or ECONOMICALLY RATIONAL ECONOMICALLY RATIONAL considerations.considerations.

3-Portfolio Investments3-Portfolio Investments

• Foreign Portfolio InvestmentForeign Portfolio Investmentstocksstocksbondsbonds

in emerging credit or equity marketin emerging credit or equity market

• 1/3 of overall net resource flows to DCs1/3 of overall net resource flows to DCs

• INVESTOR: investing in emerging countries permits toINVESTOR: investing in emerging countries permits to– Increase returnsIncrease returns– Diversify riskDiversify risk

• RECIPIENT: portfolio flows as vehicle for RECIPIENT: portfolio flows as vehicle for raising capital for domestic firmsraising capital for domestic firms

LARGE but VOLATILE … LARGE but VOLATILE …

May represent a destabilizing force forMay represent a destabilizing force for

• Financial marketsFinancial markets

• Overall economyOverall economy

(i.e. Mexico crisis, hot money)(i.e. Mexico crisis, hot money)