Financial sector development

About: Financial sector development is a research topic. Over the lifetime, 1674 publications have been published within this topic receiving 90787 citations.

Foreign Direct Investment (FDI) and Economic Growth in South Asia

Abstract: The present chapter presents analysis of the relationship between FDI and economic growth in South Asia using both time series and panel data analysis using annual data during the period 1980–2010. The analysis has been done in growth accounting framework where most of the important growth variables such as labour, capital, trade openness, human capital, infrastructure development, financial sector development, quality of institutions, macroeconomic instability, and productivity of investment are used. The analysis also tests the absorption hypothesis that the growth impact of FDI in any country is conditioned by the overall health of that country’s economy. The long-run coefficients of real per capita income were estimated using the ARDL model for all five countries. The results indicate that the coefficient of FDI is small but positive and significant for all countries except Nepal. This is further confirmed by panel results that FDI has a positive impact on the economic growth in the sample of five countries. Overall, the above results confirm that the impact of FDI on a country’s economic growth is determined by trade openness, human capital, gross capital formation, financial development, infrastructure development, and LF. Therefore, to augment economic growth, South Asian governments should identify the factors that have a positive relationship with FDI and focus on them.

Establishing an Export Credit Guarantee Scheme to Support Myanmar Exporters?: An Exploration

Abstract: Myanmar's trade deficit has widened dramatically in the past few years. One of the reasons lies in the lack of trade finance for exporters and certain financial sector shortcomings more generally. This policy note introduces the idea of establishing a public Export Credit Guarantee Scheme (ECGS) and explores if and how this policy measure could support the rebalancing of Myanmar's trade deficit. Such a scheme could help relieve export constraints by: first, facilitating access to credit for exporters by mitigating risk and increasing banks' willingness to lend; second, helping exporters to offer better payment terms to importers; and third, contributing to enhance confidence in Myanmar entities (both banks and enterprises) among foreign entities. Looking at the experience of other countries, the policy note also points to a number of guiding principles that policymakers should consider when pondering the idea of setting up an ECGS. Moreover, it highlights that certain challenges have to be expected. First and foremost, given the low level of financial sector development and limited existing knowledge on trade finance, it is questionable whether the necessary skills and capacities to properly operate such a scheme are available in Myanmar. Seeking international support can help to address this issue. A practical way forward might be to pilot an ECGS with a rather small portfolio of products that targets one or a few sectors to test the ground while limiting the public resources at risk. Keywords: Myanmar, export credit guarantee scheme, trade deficit, export promotion, financial market, trade finance. 1. Introduction Despite far-reaching reform efforts, there are still various financial sector constraints that hamper the competitiveness of Myanmar exporters and hold back the expansion and upgrading of exports. These include several financial market regulations and institutional shortcomings that complicate transactions between foreign and Myanmar entities, including businesses and banks, thereby making local suppliers less attractive to foreign buyers. In particular, a lack of access to trade finance (and credit more generally) imposes constraints on the cash flow of exporters. This is particularly grave for Myanmar, given that the country only recently has made a comeback in international trade, which implies that foreign buyers often lack the trust in Myanmar institutions and producers that develop with long-standing international commercial relationships. Generally speaking, whenever they are not paid in advance by the importer, exporters have to bridge a time gap between their expenditures on production and receiving payment. Due to longer transportation times and customs procedures, this time gap tends to be particularly large in international transactions. Exporters are thus often required to pre-finance working capital and/or the purchase of production inputs. They can try to cover these expenses through internal funds or through external funds, for example, by taking out a credit. However, export finance is very scarce in Myanmar. This can create liquidity problems for exporters that disrupt their business. In an extreme scenario, if they cannot obtain the necessary finance, potential exporters may even have to forego the export order. This is a significant issue in Myanmar, whose trade deficit has widened rapidly in recent years so that boosting exports has become a policy imperative. In principle, different policy approaches are possible to tackle trade deficits, and a variety of policy measures have been applied in practice. For example, one possibility is the restriction of imports (such as through tariffs or non-tariff barriers to trade). In this policy note, however, we focus on measures to promote exports. Some countries rely on state-owned development banks to directly lend to (potential) exporters, sometimes at subsidized interest rates, thereby expanding and facilitating exporters' access to finance (Chandrasekhar 2016). …

What works best for the poor in rural India: Poverty-lending approach or financial systems approach?

Abstract: Financial sector development serves poor directly through poverty-lending approach or financial systems approach. Robinson (2001) questions the appropriateness of poverty-lending approach for the extremely poor and supports the financial systems approach for providing a poverty alleviation toolbox to serve the poor at various levels. The present study attempts to assess the effectiveness of the two lending approaches and comments on the appropriateness of the same for the poor and the poorest of the poor in rural India using state-wise annual data from 1999–2000 to 2011–2012. We conduct a panel data analysis for a sample of 15 major Indian states and provide an empirical evidence for the effect of various poverty alleviation tools on the poor and the poorest of the poor in rural India. The study partially supports the use of tools suggested by Robinson.

Remittances and economic development in Lesotho: does financial sector development matter?

Abstract: This paper conducts an empirical investigation of the effect of remittances on economic development in Lesotho, with particular attention paid to the role financial development plays in affecting this relationship. We made use of the fully-modified OLS (FMOLS) estimation technique to examine the long run relationship between remittances and development, and this helped to control for potential endogeneity bias. The results of econometric estimations revealed that remittances have had a significant positive effect on development. Also, the results showed that financial development, when measured by broad money exerts a positive effect on development in Lesotho. When remittances were interacted with financial development, the results showed a significant coefficient. This result indicates that remittances act a buffer for alleviating credit constraints of households and also acts to ameliorate inefficiencies of the financial system on poor households.

Does financial sector development affect the growth gains from trade opennes

Abstract: A sizeable literature suggests that financial sector development could be an important enabler of the growth benefits of trade openness. We provide a comprehensive analysis of how financial development can affect the relationship between trade openness and growth using a dynamic panel threshold model and an extensive dataset for a large sample of countries for the 1970–2015 period. We find that there is a financial development threshold in which trade openness has a positive and significant link with economic growth. We also find that when splitting the sample into industrialized and non-industrialized countries, the financial development threshold that enables the trade and growth association is higher in the former group of countries than in the latter. This finding is consistent with the fact that the export composition of industrialized countries is tilted towards more capital-intensive finance-constrained goods.