Schumpeter and Financing for Development

Escrito el 19 octubre 2008 por Manuel Rincón Hércules en Economía Global

Manuel Rincón

By Manuel Rincón (Knowledge Management Officer. United Nations, ESCAP)

While drafting my PhD dissertation, I often mentioned Schumpeter economic paradigm. To be honest, I didn’t read enough most of the time and was lucky I didn’t get difficult questions on that. It was only afterwards that I read and understood better the implications.

The Trade and Investment Report 2008 by UNCTAD is out now on this topic. It claims that developing countries are reversing their current accounts and changing their external balances. In fact, developing countries are net exporters of capital. They can be divided into two groups: firstly, A countries, who are exporters of manufactures export capital; secondly, B countries, who import food and energy.

The development path for A countries is diversification and industrialization, which cannot be achieved without capital formation and skills acquisition. For this, investment is critical, needing domestic monetary policy and local financial systems. Internal capital is mainly built though reinvestment of company profits.

Such countries are open to a global environment of uncertainty (this word has the highest density in Schumpeter texts), risky investments and speculation that kills planning, makes management more difficult and has an economic cost. For sustainability, these countries need to build national institutional arrangements as buffers between international prices and domestic earnings. Only applied in critical moments, grants and international compensatory finance schemes are applied.

Schumpeter helped move from the idea that savings drove economy to the idea that decrease in savings can drive to reinvestment of company profits. This works under the assumption that entrepreneurial decisions are not based on savings but in profit expectations. Then the Keynes-Schumpeter model emphasizes the need for a reliable and affordable financing for enterprises.

Official Development Aid (ODA) has been considered the solution for B countries, where, after substantial increase of disbursements, there is evidence that aid effectiveness is not increasing. Among the many possible reasons, it depends on institutions and policies. It is a fact that good governance and accountability reduce transaction costs.

Since ODA is mainly a less uncertain source of financing for development, we can say that giving access to developing countries to international financial markets makes them vulnerable to their volatility and liquidity crises.

I guess this was the message in my dissertation without being very aware: Development and prosperity is better achieved following the A road. International organizations focus on debt relief but this has little impact without investment at the firm level. Maybe, probably, perhaps, … focus could shift to mechanisms for speedy resolutions of debt crises and fair burden-sharing among creditors and debtors, and improvement of creditor’s risk assessment.

Firmado: Manuel Rincón


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