2.6 Capital does not flow very plentifully to poor countries today

2.6 Capital does not flow very plentifully to poor countries today

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Capital does not flow very plentifully to poor countries today. Does this reflect (a) the poor countries low productivity? (b) their distortions? (c) their weak institutions (country risk)? (d) other forces? Discuss. Contrast with conditions in the 1870- 1914 era. This in part reflects their low productivity which is caused by their weak institutions - Strong institutions are essential for economic growth o Enable a country to allocate capital to its most productive uses o Financial development = significant force driving economic development o Important institutional characteristics include: Strong property rights - Encourages productive investment because ensures that return on investments aren’t taken away by government or others - Difficult for poor developing countries (expensive and time consuming) - Currently we see that in some developing countries only the very rich have property rights An efficient legal system - Enforces contracts quickly - Supports strong property rights and financial development - Will allow productive lending to take place - Promotes entrepreneurship among the poor which is extremely important o Cuts costs of starting a business Lack of Corruption - Eliminating corruption is necessary - Strengthens property rights and the legal system - Bribes reduce incentives for entrepreneurs to make investments - Allows the economic and financial system to run more smoothly High quality of financial information
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- High accounting standards so that prospective investors can easily make sense of a company’s books and make sensible decisions Corporate governance - Ensure that managers of corporations act in stockholder’s interests Sound prudential regulation and supervision of the banking system - Banks are the main institutions that allocate credit in developing countries - Government regulation to ensure that banks are making good lending
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This note was uploaded on 04/19/2010 for the course ECON 430 taught by Professor Arroyoabad during the Fall '10 term at Middlebury.

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2.6 Capital does not flow very plentifully to poor countries today

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