MIBE The economics of emerging economies The role of Finance in economic development and the emerging economies 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 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 ) India1.241 United States311 Indonesia242 Brazil196 Pakistan176 China1.344 Nigeria162 Bangladesh150 Russian Federation143 Japan127 Mexico114

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

Part 1 Economic growth and capital accumulation

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 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, f (Billions of Dollars)

1.AID THROUGH NGOS 2.OFFICIAL DEVELOPMENT ASSISTANCE 3.PORTFOLIO INVESTMENTS 4.FOREIGN DIRECT INVESTEMENTS 5.REMITTANCES Short Memo about:

1-NGOs Represent specific local and international interest groups concerning Emergency reliefEmergency relief Child healthChild health Women’s rightsWomen’s rights Alleviating povertyAlleviating poverty Increasing food productionIncreasing food production

NGOs; PROs and Cons PROs Less constrained by political imperativesLess constrained by political imperatives Strength at local levelsStrength at local levelsCons Small projectsSmall projects Short-medium term projectsShort-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 donorIts 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)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 SOURCEBy SOURCE (loans or grants have to be spent on the purchase of donor-country goods and service) By PROJECTBy 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 InvestmentForeign Portfolio Investmentstocksbonds in emerging credit or equity market in 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 returns –Diversify risk

RECIPIENT: portfolio flows as vehicle for raising capital for domestic firmsRECIPIENT: portfolio flows as vehicle for raising capital for domestic firms LARGE but VOLATILE … May represent a destabilizing force for Financial marketsFinancial markets Overall economyOverall economy (i.e. Mexico crisis, hot money)