Access to Finance and Economic Development
The finance and Economic development Progression
There is strong evidence that access to finance is conducive to economic growth. This is a long-standing view in economics. As early as 1939, Joseph Schumpeter, one of the fathers of modern economic thought, highlighted the instrumental part played by banks in encouraging technological progress and economic development.
The link between finance and growth is therefore relatively robust. However, the way in which finance is secured also matters. Finance can be accessed through external and internal sources. The former comprise capital inflows received from the rest of the world, while internal sources are the resources that an economy can muster on its own. Let me review both in turn. “The channels through which finance fastens growth include:
Access to finance through external sources
Over recent years we have witnessed a significant rebound in capital inflows, contributing to an acceleration in growth in emerging economies. Financial inflows to the main emerging economies are expected to reach USD 115 billion in 2005, around three times the level observed in 2001. This marks the end of a protracted period of retrenchment related to the Asian crisis of 1998 and the Argentinian crisis of 2001.
These include in particular the current environment of historically low interest rates and a generous liquidity endowment globally. As we have seen, this combination has prompted investors to search for higher-yield securities — or “hunt for yield” — at a time when bond yields in Europe have reached unprecedented lows, currently around 3%. In turn, this has translated into renewed interest in the overall emerging market asset class, a broadening of the investor base and a significant compression of emerging market spreads. In Europe we are witnessing increased interest in emerging market financial assets across the board.
Accessing finance through internal sources
Let us now consider domestic sources of finance. These have remained more contained, in contrast to the ease with which emerging economies have secured finance externally. This disparity means that long-term potential growth is perhaps lower than it could be.
Finance is good for growth. However, access to finance in emerging economies has been uneven across sources. Access to external sources has been relatively easy in recent years. However, access to domestic sources of finance remains more challenging and has the effect of restricting potential growth.
Accessing finance through private finance companies.
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