Finance and Development Dr. Stephen L. Harris

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Finance and DevelopmentDr. Stephen L. Harris

• Class One
• Introduction and Overview

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Whats Missing Here?
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Some Variables Explaining Growth
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IFIs Changing View of What is Important for
Development
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So Institutions Now Matter!
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Globalization of Capital
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Share of Capital Flows
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Poor States Fund Rich States!
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Imprudent Fiscal Management the Power of
Markets
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What this Course is About I

• The purpose of development is to alleviate
  poverty. So how come more progress has not been
  made over the past decade? Hopefully this course
  will shed some light on this issue.
• We will explore the consequences of finance for
  development or more specifically how finance
  contributes to the elimination of what Amartya
  Sen characterizes as "unfreedoms" (poor
  education, poor health facilities, poor
  nutrition, poor water quality... etc.)

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What this Course is About II(An Issue that
cannot be ignored)

• More recently poor countries have probably been
  moving backwards as agricultural output is
  directed towards the biofuels market not only
  pushing up food prices but also exacerbating the
  climate problems.

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FAO Food and Price Indices Feb 2007 - Feb 2008
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Global Ethanol Production (Earth Policy
Institute)
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What this Course is About II

• We will discover that not all finance is equal.
• We will explore the role of financial markets and
  marketization in development .
• We will scrutinize the Washington Consensus (WC)
  and to see how even in its original formulation
  -- it could have contributed to the elimination
  of "unfreedoms."
• However, "cherry-picking" of the WC precepts by
  the I/Os destroyed Williamsons original
  development prescription for Latin America.

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What this Course is About III

• Hopefully you will take away an appreciation of
  the power of finance (structural and relational
  power) and its influence on the development
  process and
• will understand the importance of domestic
  governance in achieving a safe and sound
  financial system without which development has
  little chance of sustainability.

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Assessment

• This class will be conducted as a seminar.
• There will be three components considered for the
  final grade
• (i) Class participation -- 20 percent
• (ii) four 5 -7 page essays (double-spaced) which
  apply the literature to a current policy issue.
  These essays are intended to be case studies
  designed to provide students the opportunity to
  exercise their understanding of the literature
  60 percent and
• (iii) two short class presentations 20 percent.

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Assessment Class Participation

• The seminar will be a combined presentation/
  discussion format. Students are required to
  complete all the readings each week prior to each
  class and to come to the class prepared to
  discuss them.
• This means being able to present your assessment
  of the readings on a rotating basis, responding
  to questions, asking questions and participating
  fully in each weeks discussion. Attendance is
  mandatory.
• Grading will be based on the quality of student
  interventions not on the quantity of
  interventions.
• The instructor will act as a facilitator and fill
  in the gaps from the presentations and
  discussions.

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Assessment Presentations

• Presentations should be about 20 minutes and
  should assume that everyone has read the
  material.
• So the approach to the presentations should be
  analytic repeating or summarizing the readings
  will not result in a satisfactory grade.
• Each presentation should conclude with two or
  three questions for discussion.

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Assessment Short Papers (Case Studies)

• Students will apply the literature to current
  public policy issues.
• These essays will provide students with an
  opportunity to test their understanding of the
  reading material. Each essay should reflect the
  students filtering of the readings as applied to
  the policy issue.
• That is to say, students should push a current
  policy issue through lens of one or more of the
  readings. Alternatively, students can also use
  one or more of the questions found on the Web CT
  course site as the foundation of these essays.
• It is advised that students read the national
  /international newspapers on a regular basis
  i.e., G M, National Post, Financial Times, New
  York Times, International Herald Tribune,
  Guardian, and the Economist so that they can be
  sure they are on top of current issues.
• The first essay will be due June 4th the second
  on July 2nd the third on July 23th, and the
  final essay on August 6th.

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Deadlines

• All deadlines are firm. No extensions. No e-mail
  submissions. Late submissions will be penalized
  by one full grade for each day the assignment is
  late. Thus an A paper becomes a B paper after one
  day. So there is not much room to dither.

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Course Materials

• The following books have been ordered for the
  bookstore
• Alison Harwood, Robert Litan Michael
  Pomerleano, Financial Markets Development The
  Crisis in Emerging Markets (Washington DC, The
  Brookings Institution, 1999).
• Augusto de la Torre and Sergio L. Schmukler,
  Emerging Capital Markets and Globalization The
  Latin American Experience (Washington DC Palo
  Alto CA, World Bank and Stanford University
  Press, 2007).
• Stefan Koeberle, Harold Bedoya, Peter Silarszky
  Gero Verheyen, eds., Conditionality Revisited
  Concepts ,Experiences and Lessons (Washington DC,
  World Bank, 2005). Available on line at
• http//siteresources.worldbank.org/PROJECTS/Resour
  ces/40940-1114615847489/Conditionalityrevisedpubli
  cation.pdf
• A Course Pack available at HAVEN BOOKS 43
  SENECA _at_ SUNNYSIDE (613 730 9888)

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Other Administrative Matters

• There is a course Web CT where both the
  lecturers and students slides will be posted
  along with announcements and supplementary
  readings.
• Students should send their PowerPoints to me a
  day prior to scheduled presentations so they can
  be posted on the Web CT
• I will also provide some possible issues that can
  be addressed in the short essays on the web site.
• Qs and As.

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What is Development?

• Perhaps is easier to say what it isnt! Its not
  economic growth for the sake of economic growth.
• Useful to think of economic growth as the agent
  for the elimination of unfreedoms such as
• Water/health
• Education/literacy
• Political/civil rights (coordination goods)
• So freedom is both the object and means of
  development

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What is Development?

• Economic growth is also an agent for
  institutional change and evolution and perhaps
  even democracy.
• The causality between democracy and development
  is still problematic and the literature is not
  unanimous about the relationship
• Development f( Democracy )
• Democracy f( Development )

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Democracy Development

• There is a stable positive relationship between
  democracy and development.
• Many scholars suggest that development causes
  democracy
• Development of social institutions ? enhances the
  level of education ? improves social and spatial
  mobility ? and promotes the political culture
  that supports liberal democratic institutions.
• But does democracy cause development?

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Democracy Development

• Charts Following
• Relationships
• Rights and Liberties vs. Income
• Rights and Liberties vs. Income Growth
• There seems to be a ve relationship between
  political development and economic development

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Democracy What Does It Mean? I

• Liberal Democracy some defining features and
  the benchmark for use in this course
• Constitutional government based on formal rules
• Constitutional guarantees of civil liberties and
  individual rights
• Regular elections one person, one vote
• Party competition and political diversity
• Independent groups and interests free of
  government interference
• Market based economy largely privately owned

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DemocracyWhat Does It Mean? II

• Dahl and Lindblom on Polyarchy
• High degree of permissiveness of opposition
  sufficiently powerful to thwart arbitrary
  policies of the government
• Can be realized because of a competitive party
  system
• Institutionally guaranteed civil liberties and
• Strong civil society.
• Many opportunities to participate in politics
  which facilitate popular responsiveness
• Can be realized through regular and competitive
  elections where citizens can replace their
  rulers.

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DemocracyWhat Does It Mean? III

• Larry Diamonds typology of democracy
• Procedural democracy (elections) governments
  offices filled as a result of contested elections
  minimalist concept
• Liberal democracies
• Pseudo-democracies (egs., Singapore, Zimbabwe
• Free elections without protection of civil
  liberties
• Institutionalized ruling party makes extensive
  use of coercion, patronage, medial control to
  inhibit legal opposition
• Non-democracies (egs., Burma, China, North Korea)

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DemocracyWhat Does It Mean? IV

• Sen (Development as Freedom) removal of
  unfreedoms
• Access to health care
• Access to clean water
• Unnecessary morbidity
• Substandard education
• Gender inequality
• Absence of political rights

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Democracy Summary

• Defines a relationship between the state and
  society?
• Who should rule?
• The state?
• The Society?
• What theory informs how society is ruled?
• Pluralism -- Corporatism
• Elitism -- Neo- Marxism
• How should power be distributed?

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Democracy, Development and Governance

• What is good governance?
• Political?
• Economic?
• Social?
• Power of economists vs. other social scientists?
• Indicators of good governance?
• Where you stand depends on where you sit.

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Growth and Development Again I

• When incomes living standards are low economic
  growth means that some of the unfreedoms
  identified by Sen are ameliorated.
• Or as Friedman puts it will human freedoms
  prevail over political and personal repression.
• As the earlier charts show changes in both
  growth and freedom in the political and social
  seem to move together.
• But growth can also cause conflict because
  growth also influences change in institutional
  and social arrangements winners and losers
  materialize.

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Growth and Development Again II

• Winners and losers are manifested in changes in
  the Gini coefficient.
• For example, while growth in China in
  indisputable the winners are located in specific
  regions of the country Beijing, Shanghai, Hong
  Kong/Guangzhou
• Population of only 200 million
• The masses still live in rural poverty
• The result is conflict reported frequently in
  the free press

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Markets and Freedom

• Economics as an academic discipline focuses on
  utilities, income and wealth and not on the
  values associated with freedom.
• This is a failure to distinguish between
  efficiencies
• Economic efficiency (biggest bang for the buck)
• versus
• Political efficiency (biggest impact on
  particularistic interests usually the
  politician or bureaucrat)
• Corruption?

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Summary

• Development requires the removal of the major
  sources of unfreedom
• Poverty
• Poor economic opportunities
• Social deprivation
• Neglect of public facilities
• Repressive states
• Finance can facilitate or hinder development
  this is what we will be exploring. But we will
  not lose sight of the purpose of development.