15) The Financial Sector In Developing Countries Flashcards
What are financial sectors like in emerging countries??
As emerging countries become more developed, there is an increasing demand for finance, personal and business bank accounts etc
This has led to the growth of financial firms in places like Asia due to the massive amounts of investment and savings happening
What are financial sectors like in developing countries??
- most people do not have access to financial institutions because of a lack of savings, with the few commercial banks refusing to serve low income people due to a lack of confidence or security
- transactions are high costs and they are often limited by financial and geographical isolation
What is the Harrod Domar model and what is the equation??
-the model suggests that a countries rate of growth depends on the level of national saving and the productivity of capital investment
Rate of growth= savings ratio/capital output ratio
According to the Harrod domar model, what two ways can GDP growth be increased?
- Increase the level of savings as a % of GDP- easier with better financial institutions
- decrease the capital output ratio by improving the quality and productivity of capital inputs
What is micro finance??
-Schemes where firms/people provide finance for small scale projects in developing countries, who otherwise would have no access to finance from commercial banks
What problems did small businesses in developing countries face before microfinance?
Due to a lack of security and High risk, small firms could only get very high interest rates on loans for projects, or couldn’t get them at all
What benefits does microfinance provide??
- loans
- current and deposit accounts
- micro insurance
- financial and business education
Evaluation of whether microfinance helps developing countries out of poverty
Sustainability- due to high costs and risks involved, it might not be sustainable to help the very poorest; a better return will be seen by people in relatively less need of the help
Interest rates- High interest rates needed to cover transaction costs and sometimes add a premium for risk too
Regulation- will there be enough regulation in place to ensure provides and consumers and protected
Extent of help- microfinance can not cover the cost of big infrastructural developments like education and schooling, and can not help everyone in need of it
What are the 4 main inflows of finance intro developing countries??
ODA- Official development assistance to fund overseas projects
FDI- companies investing into foreign countries to expand their company ie MNCS
Remittances- people who have moved away sending back their earnings to family in their country
FPI- debt and portfolio investment- ie foreign companies buying shares in companies from developing countries or bonds to be repaid in the future
Evaluate the extent to which international financial markets have influenced flows financial capital into developing economies?
-FDI- largest source of international finance flow and can be very beneficial to developing countries as MNCs bring expertise, jobs, training as well as developing local infrastructure; however they can be exploitive and create environmental problems for short term gain due to cheap labour
ODA- some people think its wasteful as its lost though corruption whilst some people think it should be increased further to alleviate poverty
FPI- profit orientated- investors see much more potential for growth in financial assets developing countries due to large amounts of resource potential; however this type of investment is most prone to capital flight as people will move their money elsewhere in the event of any signs of economic problems
What is hot money and capital flights?
Hot money- monetary flows into a country due to the appreciation of an exchange rate which makes financial assets grow at a faster rate; also increases the price of the currency due to higher demand
Capital flight- the rapid movement of assets and money away from a country due to economic or political problems eg the 07-08 crash
