International Financial Barriers: indebtedness, non-convertible currencies, capital flight.
An important requisite for development is foreign capital, or foreign investment. International financial barriers are barriers to financial markets and are thus barriers to development.
Indebtedness is the issue of owing extreme amounts of debt to the point where it is unsustainable. This can cause the following issues:
Diversion of funds: money spent on debt is money that is not spent on infrastructure, healthcare, education, and general development
Further debt: indebtedness can cause further debts as countries take on loans to pay off their current debts
Harsh policies: Countries with reputations and poor track records due to their high debt cannot attract private loans and are forced to take loans with a lot of strings attached from international financial institutions or tied aid from countries like the US. Austerity/loss of sovereignty
Non-convertible currencies: currencies that cannot be freely exchanged on the foreign exchanged market (due to being fixed, overvalued, or weak)
Fixed exchanged rates often cause rates to be set at a higher exchanged rate than the market would dictate, causing the currency to be overvalued. These currencies are non-convertible because they have black markets and because they are overvalued. Examples are the: birr (Ethiopia), kip (Laos), or gopik (Azerbaijan) which are not accepted outside of their country of origin. The non-convertible nature of these currencies causes the following problems:
limited trade and foreign investment
Exporters in countries with non-convertible currencies will have to exchange their foreign currency at the overvalued exchange rate; this is effectively an export tax as they lose money from this exchanged
Black markets for currency distort prices and put off investors/traders
Capital Flight refers to firms, governments, and individuals transferring their assets abroad. This could occur due to the following reasons:
Corruption and lack of institutions: corruption is a disincentives for the private sector to keep their money in a country as it could be embezzled or lost
Insecurity: developing countries suffering from a wide array of destabilizing issues, of which corruption is one, are not secure places to keep assets. Lawlessness, poverty, etc.
Inadequate policies: exchange rate misalignment and high debt can cause capital flight. Weak economic policy will dissuade firms and citizens from keeping their money in these institutions
Financial deregulation: global capital markets have become more deregulated and thus more efficient. This has made capital flight easier
Capital flight causes the following problems:
it denies developing countries funds for investment and also weakens banks in these institutions, again making loans and investment difficult
it dissuades donors, aid agencies, and foreign investors from investing/giving aid to/loaning money to a country where the money all leaves anyways
it results in unnecessary debt. Debt that is accrued so corrupt government officials can embezzle money and put them in foreign accounts is money that does not help but only hurts development efforts.
An important requisite for development is foreign capital, or foreign investment. International financial barriers are barriers to financial markets and are thus barriers to development.
Indebtedness is the issue of owing extreme amounts of debt to the point where it is unsustainable. This can cause the following issues:
Non-convertible currencies: currencies that cannot be freely exchanged on the foreign exchanged market (due to being fixed, overvalued, or weak)
Fixed exchanged rates often cause rates to be set at a higher exchanged rate than the market would dictate, causing the currency to be overvalued. These currencies are non-convertible because they have black markets and because they are overvalued. Examples are the: birr (Ethiopia), kip (Laos), or gopik (Azerbaijan) which are not accepted outside of their country of origin. The non-convertible nature of these currencies causes the following problems:
Capital Flight refers to firms, governments, and individuals transferring their assets abroad. This could occur due to the following reasons:
- Corruption and lack of institutions: corruption is a disincentives for the private sector to keep their money in a country as it could be embezzled or lost
- Insecurity: developing countries suffering from a wide array of destabilizing issues, of which corruption is one, are not secure places to keep assets. Lawlessness, poverty, etc.
- Inadequate policies: exchange rate misalignment and high debt can cause capital flight. Weak economic policy will dissuade firms and citizens from keeping their money in these institutions
- Financial deregulation: global capital markets have become more deregulated and thus more efficient. This has made capital flight easier
Capital flight causes the following problems: