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MIBE
The economics of emerging economies
The role of Finance in economic
development and the emerging
economies
Gianni Vaggi
University of Pavia
April, 2014
MIBE
The economics of emerging economies
The role of Finance in economic
development and the emerging economies
Finance 1-1
Different financial flows and the Balance
of Payments
Introduction:
The rich and the poor
Countries with more than 100 million people, 2011
(World Development Indicators 2013)
China
1.344
India
1.241
United States
Indonesia
Brazil
Pakistan
Nigeria
Bangladesh
311
242
196
176
162
150
Russian Federation
143
Japan
127
Mexico
114
Population Density
Population, millions
World Bank income groups
GNI 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
GNI per capita 2010 Atlas Method and PPP
37,317
High Income
38,910
2,148
Sub-Saharan Africa
1,176
3,124
South Asia
1,176
8,068
Middle East & N. Africa
3,874
10,926
Latin America & Carib.
7,733
13,396
Europe & Central Asia
7,272
6,657
East Asia & Pacific
3,696
0
5,000
10,000
Gross National Income per capita 2010 [$] PPP
15,000
20,000
25,000
30,000
Gross national income per capita 2010 [$] Atlas method
35,000
40,000
Part
1
Economic growth and
capital accumulation
GDP growth rates 1965-2010(averages)
10
8
6
4
2
0
-2
-4
High Income
East Asia and the
Pacific
Latin America and the Middle East and North
Caribbean
Africa
1965-1980
1980-1990
1990-2000
South Asia
2000-2010
Sub-Saharan Africa
East Europe and
Central Asia
-10
-20
-30
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
GDP Growth rates
30
20
China
10
Korea, Rep.
Mexico
0
Brazil
South Africa
Vietnam
Malaysia
Gross fixed capital formation (% of GDP)
50
45
BRA
40
35
RUS
30
IND
25
CHN
20
15
SAF
10
EAS
5
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
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 2
What if a country does not have
its own capital to accumulate?
Financing Development
Private
Public-ODA
•FDIs
•Bilateral
•Workers’ remittances
•Portfolio Investment
Non debt
•Multilateral
•Stocks
•Bonds
•Loans
•NGOs
•Technical assistance
Debt
•Concessional loans
•Grants
•Debt cancellation
Total net resource flows to developing countries,
by type of flow, 1990-2016f (Billions of Dollars)
Short Memo about:
1. AID THROUGH NGOS
2. OFFICIAL DEVELOPMENT ASSISTANCE
3. PORTFOLIO INVESTMENTS
4. FOREIGN DIRECT INVESTEMENTS
5. REMITTANCES
1-NGOs
Represent specific local and international
interest groups concerning
• Emergency relief
• Child health
• Women’s rights
• Alleviating poverty
• Increasing food production
NGOs; PROs and Cons
PROs
• Less constrained by political imperatives
• Strength at local levels
Cons
• Small projects
• Short-medium term projects
2-Foreign Aid, ODA
DEF.
Any flow of capital to LDCs
• Its objective should be non commercial
from the point of view of the donor
• It should be characterized by concessional
terms (i.e. i and repayment period for
borrowed capital less stringent then
commercial terms)
Aid can be tied
• By SOURCE
(loans or grants have to be spent on the
purchase of donor-country goods and
service)
• By PROJECT
funds can only be used for a specific
project
Aid Allocation
Rarely determined by relative needs of DCs.
Most bilateral aid seems unrelated to
development priorities and are based
largely on POLITICAL or
ECONOMICALLY RATIONAL
considerations.
3-Portfolio Investments
• Foreign Portfolio Investment
stocks
bonds
in emerging credit or equity market
• 1/3 of overall net resource flows to DCs
• INVESTOR: investing in emerging countries permits to
– Increase returns
– Diversify risk
• RECIPIENT: portfolio flows as vehicle for
raising capital for domestic firms
LARGE but VOLATILE …
May represent a destabilizing force for
• Financial markets
• Overall economy
(i.e. Mexico crisis, hot money)