financial sector Flashcards
l75-77 (16 cards)
whats the role of the financial sector in developing economies
Supporting trade via FOREX markets to boost export growth and enable access to imports - facilitates the conversion of local currency into foreign currencies, enabling firms in developing economies to import capital goods and raw materials needed for production, boosting economic activity. can attract fdi- reduce currency risk, encouraging foreign investors to invest in infrastructure, businesses, and industries in developing countries, increasing capital inflows.
Allows savings to be accumulated to be used as investment funds for firms as banks have more reserves to help fund lending. This is especially vital in enabling I to purchase capital to enable firms and the economy to grow. Can help hedging and liquidity helping create a stable economic environment
whats an issue though
financial sector in these economies may be underdeveloped which restricts economic growth in terms of C, I & X and LRAS. Major problem for rural areas in developing economies as local branches of banks are not profitable to open so they don’t have access. Financial exclusion means that many people and small businesses in developing countries may not have access to financial services, limiting the positive impact. People may not be able to borrow and save effectively- stable place to borrow for mortgages and investment?
Weak regulation and poor institutional quality in developing countries reduce confidence in the financial sector, deterring both domestic and foreign investors from investing in the economy.This lack of confidence leads to lower capital inflows and limited availability of finance for businesses, restricting investment in productive activities and infrastructure.As a result, economic growth slows down because firms cannot expand or improve productivity without sufficient funding. Furthermore, poor regulation increases the risk of financial crises, such as bank failures or currency crashes, which can cause economic instability and reverse development gains.
what are 2 factors that limit the economic development of developing economies
Access to credit and banking- it is difficult to access finance as there is less of a financial infrastructure, such as banking, in developing countries. It is riskier for lenders to ensure that they can get a return on their money-Many may go bankrupt so they charge a high rate of infrastructure.
infrastructure- necessary so that firms are able to run effectively and efficiently. Less investment in infrastructure means that it is more difficult to achieve growth and development in an economy
what is the harrod- domar theory
economic growth depends on the level of savings and the productivity of investment.
More savings → more investment → more growth
Faster capital productivity → higher growth
what is a savings gap
difference between the amount of money individuals, households, or a country need to save and the amount they are actually saving
developing economies have this
what does HD require for econ growth in LR
Developing economies have a SAVINGS GAP. Low level of savings constrains economic growth in LR
how can hot money flows help decrease a savings gap
hot money flows- increases pool of funds available for investment and lending
how can FDI help decrease a savings gap
providing external capital for investment, reducing the immediate need for domestic savings to fund development
how can foreign aid help decrease a savings gap
External funding that fills this gap, allowing:
Construction of schools, roads, hospitals
Investment in energy or agricultural projects
Human capital development (e.g., health, training)
etc type shi
what is capital flight
occurs as individuals/firms in developing countries send money abroad to safer havens as instability in developing countries might lead to risk for their financial assets
what are capital inflows
often occur as international markets seek high returns on their capital. Emerging markets often see significant returns as they have high growth. This is reflected in markets e.g. the stock market
why may capital outflows increase quickly
herd instinct of markets moves this capital out of the economy when they see problems developing in the emerging market
This causes problems with liquidity and exchange rate depreciations.
what is a problems international financial markets & impact on developing/emerging economies (FDI)
FDI- in terms of econ uncertainty as its sensitive to risk- can cause investors to pull back, critical investments underfunded or delay projects as many developing/emerging economies were not in the last global recession. (economic cycle impact)
whats a problem to do with public/ private sector of funding debt
If private/public sector debt is used to fund I the risks are much lower as many of the projects will provide a return for firms or government to be able to funds debt interest. BUT if such loans are used by households, firms and government to fund consumption then there is no real ability to repay the borrowing leading to unsustainable debt levels. Emerging economies such as China can sustain high debt levels due to I and high current account surpluses.
whats a real life example of this
e.g many Sub-Sarahan African nations reliant on financial account inflows to cover this
whats an evaluation point about firms and forex
If funds are obtained to reduce the savings gap it still might make it difficult to expand the productive capacity (stock) as a lack of foreign exchange due to low demand (or value) of exports (a FOREX GAP may exist). Firms might find it difficult to purchase foreign capital goods required to expand manufacturing capacity.
