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Financial development, growth strategies and structural transformation

Kromtit, Matthew (2022) Financial development, growth strategies and structural transformation. PhD thesis, University of Glasgow.

Strategizing economic growth and development in developing countries remains a daunting task for several years. Developing countries for long suffer from the many characteristics of underdevelopment. These range from slow economic growth to high levels of unemployment and poverty, increased population explosion with little or no corresponding increase in productive capabilities. For decades too, the economic literature has shown that several private and public sector-led strategies have failed to guarantee long term economic progress especially in developing countries. Whether mainstream or heterodox, what constitute appropriate growth strategies for developing countries is complex and highly debatable. This thesis therefore generally seeks to ignite better understanding of the strategies for growth and their determinants as well as to renew the debate on the essentials for strategizing growth in developing countries. The thesis attempts to provide some evidence on this general objective by investigating three specific topics in three empirical chapters. This is in addition to introductory and concluding chapters.

Chapter one motivates the thesis and specifies the objectives particular to each empirical chapter. Chapter two focuses on providing evidence on the role of financial development in determining whether developing countries follow or defy their comparative advantage. This area has been largely ignored in the literature on finance and development. Using dynamic panel data spanning across 132 developing countries and two-step system generalized method of moments (GMM), the results of this chapter mainly show that financial development in terms of the depth of banking sector tends to lead to comparative advantage – following (CAF) growth strategy but it tends to lead to comparative advantage – defying (CAD) in terms of financial efficiency. Based on these findings, chapter three introduces the analysis of financial and trade liberalization, interventionists policies and economic diversification in resource-rich developing countries. The empirical evidence reported in this chapter suggest that though liberal and interventionists policies matter in promoting economic diversification – in terms of enhancing manufacturing, the interaction of these policies with regulation could lead to an expanding services sector at the expense of manufacturing in resource-rich countries. Chapter four explores whether global value chains (GVCs) – related trade and conventional trade play a role in the structural transformation of resource-rich and non-resource-rich developing countries. The results show that the share of domestic value added in gross GVC-related exports and conventional trade have the tendency to aggravate employment and value addition respectively in the agricultural sector of Non-Resource-Rich Countries (NRRCs). In Resource Rich Countries (RRCs), the findings show that conventional trade have negative and significant impact on value-added in manufacturing while the share of foreign value added in gross GVC-related trade reports positive and significant impact on share of labour employment in services but not on the value added in the sub-sector.

Thus, the findings of the thesis tend to have implications for what constitute an appropriate development strategy in developing countries. Overall, the findings imply that all hope is not lost in developing countries. Given their factor endowments, developing countries could harness them with the appropriate combination of interventionists and liberal policies as well as the right mix of domestic and foreign value addition in promoting economic diversification and structural transformation. It remains however, a challenge for these countries to draw a line between what constitutes effective strategies or policies thereby leaving room for further research as suggested in chapter five of the thesis.

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• Financing For Sustainable Development Report 2024

Financing for Sustainable Development Report 2024

The world is facing a sustainable development crisis. The 2024 Financing for Sustainable Development Report: Financing for Development at a Crossroads finds that financing challenges are at the heart of the crisis and imperil the SDGs and climate action. The window to rescue the SDGs and prevent a climate catastrophe is still open but closing rapidly.

Financing gaps for sustainable development are large and growing – the estimates by international organizations and others are coalescing around $4 trillion additional investment needed annually for developing countries. This represents a more than 50% increase over the pre-pandemic estimates. Meanwhile, the finance divide has not been bridged, with developing countries paying around twice as much on average in interest on their total sovereign debt stock as developed countries. Many countries lack access to affordable finance or are in debt distress.

Weak enabling environments are preventing progress. Average global growth has declined, while policy and regulatory frameworks still do not set appropriate incentives. Public budgets and spending is not fully aligned with SDGs. Private investors are not incentivised to invest enough in SDGs and climate action. 

The world is at a crossroads. This is the last chance to correct course if we want to achieve the SDGs by the 2030 deadline. Only an urgent, large-scale and sustainable investment push can help us achieve our global goals. Next year’s Fourth International Conference on Financing for Development in 2025 will be a once in 80-year opportunity to support coherent transformation of financing. Four actions are needed:

• Close financing gaps for SDG/climate investments (both public and private) at scale and with urgency;
• Close policy and architecture gaps, and reform international institutions;
• Close credibility gaps and trust deficits both international and domestically; and 
• Formulate and finance new development pathways.

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Financial exclusion and inflation costs

• Research Article
• Published: 13 April 2024

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• Diogo Baerlocher   ORCID: orcid.org/0000-0002-9647-6219 1  

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This paper constructs two models of financial exclusion to assess the welfare costs of inflation. In the first, inflation costs are measured within a classical endowment economy. The second includes a production sector and costly credit. Both models are calibrated to account for inflation costs in a high-inflation economy (developing country) and in a low-inflation economy (developed economy). In an endowment economy, when inflation is reduced from 1.5% to zero in a developed economy, the welfare costs for agents with (without) financial access are 0.38% (0.43%) consumption equivalent variation (CEV). In a model with costly credit, the welfare costs for agents with (without) financial access are 0.87% (1.3%) CEV. For developing countries, when inflation is reduced from 3.2% to zero, the welfare costs for agents with (without) financial access are 0.72% (2.56%) in an endowment economy. In the costly-credit model, the welfare costs for agents with (without) financial access are 0.3% (3.1%) CEV. The main finding is that there is a substantial asymmetry in welfare costs between individuals with and without access to financial services, especially in developing countries.

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Acknowledgements

I’m indebted to Tiago Cavalcanti, George Deltas, Stephen Parente, and Rui Zhao for valuable comments. All remaining errors are mine.

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Steady states

1.1 pure exchange economy.

The system of equations that characterize the steady state in the pure exchange economy is:

where \(r=1/\beta -1\) in the steady state.

1.2 Economy with production and costly credit

In the steady state \(r = 1/\beta - \delta \) and \(n^g(s^B) = 1 - \int _0^{s^B}{\gamma (j)dj}\) . Therefore we can write aggregate capital and wages as a function of \(s^B\) such that

The system of equations that characterize the steady state is:

Proof of Lemma 1

This proof is similar to the one found in Dotsey and Ireland ( 1996 ). Let \(\beta ^t\lambda _t\) be the Lagrange multiplier on the budget constraint and \(\beta ^t\phi _t\) be the Lagrange multiplier on the cash-in-advance constraint. Then, the first order conditions from the type- B agent lead to:

Moreover, profit maximization for the firm in the intermediary sector leads to the following supply choice:

note that Eq. ( B4 ), together with the zero profit condition for the credit service market and the equilibrium for this market implies that

for all j demanded by type-B individuals, i.e., \(\xi _t^B(j) = 1\) .

Let \(s_t^{B}\in {\mathcal {J}}\) be the good for which type-B individuals are indifferent between buying with credit or money, such that the inequality in Eq. ( B3 ) holds with equality. Substituting Eqs. ( B1 ), ( B2 ) and ( B4 ) into Eq. ( B3 ) at equality yields:

which defines \(s_t^B\) .

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Baerlocher, D. Financial exclusion and inflation costs. Econ Theory Bull (2024). https://doi.org/10.1007/s40505-024-00265-x

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Received : 14 December 2022

Accepted : 26 March 2024

Published : 13 April 2024

DOI : https://doi.org/10.1007/s40505-024-00265-x

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Guide for adaptation and resilience finance (april 2024), attachments.

Launch of a new roadmap for financing adaptation and resilience

• Call for step-change in financing adaptation and resilience as breakthrough Guide for Adaptation and Resilience Finance (the Guide) offers clarity and transparency to accelerate investment.
• The Guide sets out -- for the first time -- eligible financeable activities and guidance on what constitutes adaptation and resilience investment, alongside a practical roadmap for financing and investment opportunities.
• Created by Standard Chartered, KPMG and the United Nations Office for Disaster Risk Reduction (UNDRR) -- with support from 20+ leading financial institutions, multilateral development banks (MDBs) and NGOs -- the Guide responds to the urgent call to mobilise private finance for adaptation and resilience, issued at COP28.

The United Nations Office for Disaster Risk Reduction (UNDRR), Standard Chartered, and KPMG are today calling for a step-change in the mobilisation of finance for adaptation and resilience ahead of COP29, particularly in emerging markets. This comes as Standard Chartered, KPMG and UNDRR launch a breakthrough roadmap to galvanise and align sector-wide efforts to address the significant finance shortfall in adaptation and resilience.

The Guide for Adaptation and Resilience Finance , developed with support from more than twenty leading financial institutions, Multilateral Development Banks (MDBs) and NGOs -- including the African Development Bank and the United Nations Environment Programme Finance Initiative -- represents a practical tool for investors, commercial banks, and other financial institutions by:

• Setting out a common reference for adaptation and resilience alongside a list of financeable adaptation and resilience themes and activities, forming a classification framework
• Simplifying the decision-making process when financing adaptation and resilience through principles and guidance based on latest best practice definitions and frameworks. This Guide aligns with the seven resilience themes outlined in the UNDRR and Climate Bonds Initiative Climate Resilience Classification Framework.
• Identifying priority investments and their co-benefits, including emissions reductions and nature protection and conservation, alongside adaptation and resilience benefits

The Guide maps over 100 investable activities across adaptation and resilience, including: climate-resilient crops, vertical farming, natural flood protection, water conservation and efficiency measures, public hospital infrastructure investment, renewable energy storage solutions, and mangrove conservation and replanting.

The latest UN analysis on global climate impacts underlines the need for urgent action, with 2023 marking the hottest year on record amid rising sea levels and the increased frequency and intensity of extreme weather. Economic losses from natural and climate-related disasters are estimated to cost more than USD 330 billion per year , and this figure is just the tip of the iceberg of the real uncounted costs on people's lives.

Today, less than 10% of all climate finance is allocated to adaptation. The global adaptation financing gap is widening, and current levels of funding remain well below the estimated USD 212 billion per year needed through to 2030 in developing countries alone.

Research conducted by Standard Chartered, published in the Bank's Adaptation Economy Report, found that for every USD 1 spent on adaptation this decade, an economic benefit of USD 12 could be generated -- highlighting the significant economic pay-off of early action towards adaptation and the potential gains for investors .

Paola Albrito, Acting Special Representative of the UN Secretary-General for Disaster Risk Reduction United Nations Office for Disaster Risk Reduction (UNDRR), said: "This guidance comes at an important moment as governments look to enable greater investment in resilience, including through the G20 work on disaster risk reduction. Financial actors can get ahead and take advantage of this guidance to develop financial products, such as adaption and resilience loans and bonds, that can mobilise private capital. I encourage the financial community to use this opportunity to set targets for themselves in terms of investment portfolios allocated to these objectives."

Marisa Drew, Chief Sustainability Officer, Standard Chartered, said: "Finance and investment for adaptation and resilience needs to rapidly scale to address a critical shortfall amid rising demand. We need to embed adaptation and resilience into financial decision-making, to ensure we understand and manage the financial risks and recognise the potential of adaptation and resilience as investable asset classes. The Guide will help offer confidence to investors looking to allocate capital to adaptation and resilience projects, helping to advance sector-wide understanding and drive the critical step-change we need to see in capital mobilisation for this crucial area of sustainable finance."

David Greenall, Global Managing Director, Climate Risk, Decarbonisation, Nature & Adaptation, KPMG International, said: "Emerging markets and developing economies have a disproportionate risk of exposure to the negative effects of rising temperatures and extreme weather, and in many cases have fewer resources or less capacity to respond. We need capital to move in the right direction and to mainstream natural and climate hazard resilience into financial flows. Commercial banks and private investors have an opportunity to lead in meeting the adaptation challenge. I encourage the banking and investment community to use this Guide as a key resource when considering how and where to invest more proactively and ambitiously in a resilient future."

The Guide responds to a COP28 call for consistent and common language to align efforts in addressing the shortfall -- outlined in the UAE Framework for Global Climate Resilience, as part of the UAE Consensus agreed at last year's UN climate summit.

Ahead of COP29, the private sector, MDBs and other financial institutions have a vital role to play, in collaboration with governments and wider stakeholders, to accelerate the deployment of capital towards adaptation and resilience. To galvanise efforts ahead of the summit, Standard Chartered, KPMG and UNDRR are inviting further collaboration with plans for financial sector dialogues, including a convening at Ecosperity Week in Singapore (17 April).

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