Lecture Development policy: Financing development

Lecture Development policy: Financing development includes content: savings and investment, finance in the real world, financial repression, increasing the supply of longterm finance, reducing speculation,... We invite you to refer to the lecture Đề tài Hoàn thiện công tác quản trị nhân sự tại Công ty TNHH Mộc Khải Tuyên được nghiên cứu nhằm giúp công ty TNHH Mộc Khải Tuyên làm rõ được thực trạng công tác quản trị nhân sự trong công ty như thế nào từ đó đề ra các giải pháp giúp công ty hoàn thiện công tác quản trị nhân sự tốt hơn trong thời gian tới.

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FULBRIGHT SCHOOL OF PUBLIC POLICY AND MANAGEMENT

Financing development

Development Policy

Summer 2023

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Why is the market for credit different from goods markets?

• Goods markets are spot markets: It is easy to know what you are getting

by just looking at it, and the transaction is completed immediately.

• The price of goods reflects supply and demand at any given time If the

price is too high, you can go to another market and get goods of a similar

quality

• Credit is a promise to repay money at a future date But future is

unknown.

• So credit is always rationed The market never clears

• There is always more demand for credit than bankers are willing to

supply

• Lenders ration credit based on information that they have about

borrowers.

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Savings and Investment: The Conventional Story

• Say’s Law: Supply is always equal to demand (the economy always

operates at full employment)

• If Say’s Law is true, then savings always equals investment

• Households earn income and save part of it in banks

• Banks then loan these savings to businesses for investment

• The equilibrium of savings and investment is at the real interest

rate

• The stock of savings is “loanable funds”

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Finance in the real world

• Banks do not lend money already in their vaults Banks create money (deposits)

when they make loans

• Investors borrow money and pay wages, some of which is saved

• Investment that generates savings, not the other way round

• The real interest rate is set by the central bank It is not an equilibrium rate

• The stock of loanable funds is not a limiting factor on financing

• Financing is limited mostly by demand: The availability of viable, profitable

projects

• Banks also need to be able to cover their immediate obligations (pay

depositors when they want to withdraw their money)

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Conventional thinking: “Secular stagnation”

• There is a surplus of savings because

the population in Europe, North

America and Japan is getting older

and saves too much

• New technologies are so efficient

that less investment is needed

• So real interest rates will stay at

historic lows

• But the problem is not savings: its

not enough investment demand

US Corporate fixed investment, average annual growth (Source: OECD)

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

1970s 1980s 1990s 2000s 2010s

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Korea as a developing country: Low savings and investment

• Savings in Korea was the result of

rising investment, not its cause

• Government directed credit to

export industries to take advantage

of foreign demand

• Main constraint on Korea was not

savings, but foreign exchange

(access to dollars to buy machines

and inputs) and demand

0%

2%

4%

6%

8%

10%

12%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993

Gross domestic savings (% GDP) Gross capital formation (% GDP) GDP growth (%)

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“Financial repression”: McKinnon and Shaw

• Government controls on credit and interest rates results in “financial repression”

and reduces the supply of savings for development

• The debt crisis of the 1980s gave the IMF and World Bank leverage to insist on

financial liberalization as part of “structural adjustment programs” especially in

Latin America.

• Privatization of state-owned commercial banks including FDI in banking sector

• Deregulation of domestic banking, including creation of new instruments and

products (increasing systemic risk)

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Financial liberalization, 1980-2009

• Experiments attempted across

the developing world

• Savings and investment rates

did not rise

• The real interest rate had no

affect on savings

• Rapid increase in financial

crises because too many banks

allowed to open, and they lent

too much money

• Culminating in East Asian

Financial Crisis of 1998

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Gross domestic savings (% GDP)

Viet Nam 2010-19

Viet Nam 2000-09 Viet Nam 1990-99

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Financial crises and growth in Asia and Latin America

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Argentina Mexico

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Indonesia Thailand

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Financial liberalization failed to raise the rate of growth

• Growth slowed after financial

liberalization and investment did

not increase until after 2000

• Periodic financial crises reduced

average growth rates in the

developing world

• But the rise in investment and

growth was related to relocation

of manufacturing to Asia, not

financial liberalization

0%

1%

2%

3%

4%

5%

6%

7%

0%

5%

10%

15%

20%

25%

30%

35%

Investment/GDP and GDP growth in Low and

Middle Income Countries

Investment/GDP GDP growth

Tiêu đề	Financing Development
Trường học	Fulbright School of Public Policy and Management
Thể loại	development policy
Năm xuất bản	2023

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Số trang	17
Dung lượng	486,88 KB