Lecture 11: International finance and currencies
Types of finance
There are six kinds of international finance, of which the first two involve governments
and the other four involve the private sector.
I’ll spend just a minute on government financing. The government of a developing
country can get money by borrowing it or by being granted it. First, as we’ve discussed, the
governments of developing countries borrow money from the international development banks,
the World Bank and the regional development banks. Since the money is borrowed at rates of
interest and other repayment terms that are far below commercial terms--one percent interest
rates and forty years to repay, perhaps--loans of this sort are referred to as concessionary loans.
Grants and concessionary loans are the main form of international finance in low-income
countries. Second, a government to government grant is called ODA or official development
assistance, otherwise known as foreign aid. For example, the government of Japan can grant the
government of Cambodia $50,000,000 to build a road to Angkor Wat. This is not completely
disinterested: first, Japan can require that the road be built using a Japanese construction
company, and second, Japan gathers some good will in the process. Still, the road is built and
costs Cambodia nothing
I want to focus now on the four kinds of private finance. These are divided into two main
kinds, equity and debt. That is, people can come and invest in a company in another country or
they can lend money to a company in another country. There are two kinds of investment:
foreign direct investment or FDI, which we’ve already discussed, and FPI or foreign portfolio
investment, where foreigners buy stocks on the stock exchanges of other countries. FPI has been
growing in importance recently, as more and more countries have opened their own stock
There are also two kinds of loans: first, corporate bonds, where companies raise cash by
issuing a promise to repay interest to the bondholders before it can retain any profit or distribute
profit to the shareholders, and second, commercial loans from banks. While ODA and
development loans are the main form of financing in low income countries, at least at the
beginning, FDI, FPI, commercial loans and bonds are the main form of financing in middle
income countries like Brazil and Thailand.
The differences between different kinds of investments.