Lessons from Emerging Market Economies - Literature review Example

LESSONS FROM EMERGING MARKET ECONOMIES Emerging markets are defined as economies whose trade or business activities are experiencing rapid expansion and growth. Rousseau and Sylla (2001) add that emerging markets are characterized by rapid growth of industries. To achieve and maintain rapid growth of trade and the economy, emerging markets must therefore consider to importance of financial systems are prerequisites for economic growth. This is because banking institutions, securities and sound regulation of the financial system by a national or central bank are economic requirements which catalyze trade and thus propel the rate of economic growth. This paper is based on the writings of Rousseau and Sylla on financial institutions and their role in expansion of trade and economic growth. Lessons which can be learned by emerging economies from the US are presented and described at length within this paper. Moreover the paper discusses the implementation of various models for a sound financial system and description of its role in enhancing expansion of trade and economic growth of emerging markets. It is through a good or sound financial system that rapid economic growth can be realized by emerging market. As a result, emerging economies must put in place a sound public debt and finances system (Rousseau and Sylla, 2001, p. 2). The financial markets are critical in the development of any economy and thus emerging markets must prioritize stabilization of their financial systems. For example, the remarkable growth of the US capital markets and banking systems is attributed to the rapid growth of its economy and acceleration of trade within the country and internationally (Rousseau and Sylla, 1999, p. 4). This illustrates the role of financial markets in empowering individuals and businesses through provision of credit facilities as capital to enhance their trade. The efforts of the individual businesses in their trade endeavors will in return promote the ultimate economic growth of the economy. Moreover, the confidence and morale of investors is improved when there is availability and access to credit facilities. As a result, the investors will make use of the credit facilities and invest in the economy leading to expansion of trade and the economy in general. Monetary exchanges which characterize trade activities are promoted through a sound financial system. Banks enhance business transactions which are attributed to expansion of trade within emerging markets and thus growth of businesses. Rousseau and Sylla (2001, p. 42) emphasize that expansion of businesses into corporations and their internalization demonstrates a rapid growth of the economy. Rousseau and Sylla (1999, p. 15) reaffirm that the growth in stock of money or liquid money through expansion and increase of bank loans promotes financial development, economic growth and trade. For example, the increased liquid money in the expanded US bank credit boosted foreign investment through investors who were now more confident to invest in the economy. As a result imports were encouraged in addition to the increased application of modern production methods and thus internal economic growth. In this sense, financial are accredited for expansion of a country’s trade into import and export trade. Because of the growth of an emerging market’s trade into international orientations, foreign exchange is attained and hence further growth of the economy. It is the liquid money which finances businesses within an emerging economy Rousseau and Sylla (1999). The rate of exchange of liquid money within an economy demonstrates that there is rapidity of trade activities and hence a reflection of an expanding economy. According to Rousseau and Sylla (2001, p. 21), stable monetary arrangements within a country is one of the most important prerequisites to expansion of trade and growth of the economy. Monetary arrangements include policies which govern the financial systems. This means that emerging markets or economies must put in place a regulatory system for its financial markets in order to enhance their effectiveness. As a result of stable monetary arrangements, fluctuations in foreign exchange will be prevented and thus warrant for a stable economy. Additionally, stable financial arrangements will encourage investors to invest on securities and capital on the economy which ultimately defines a positive economic growth. Furthermore, stable monetary arrangements will ensure that businesses within an emerging market do not register any negative growth. It is thus through proper regulation and stabilization of the financial markets that an emerging economy can be able to promote trade activities which define the rate at which the market experiences economic growth. For emerging markets or economies to experience a more rapid economic growth and expansion of trade, they must have a large number and variety of banking institutions with diverse financial services so that the unique economic needs of investors are met (Rousseau and Sylla, 2001, p. 4). Financial institutions or banks within the domestic market and international markets or both must be available for trade within an emerging economy to be facilitated. These assertions reveals that expansion of trade depends on the ability of the financial institutions within an economy to cater for individual, business, company and multinational corporations’ financial needs with due effectiveness. Domestic markets should have an adequate number of financial institutions to provide banking services to the small businesses and individual investors. Additionally, banking institutions with international orientations provide effective banking services for international businesses and a result promotes import and export trade within an emerging economy. Through a central bank, an economy will be able to ensure that there is stability within the domestic financial institutions. Rousseau and Sylla (2001, p. 32) add that a central bank acts to manage and regulate all financial relations and exchanges with the international economic markets. Central banks and their regulatory role ensure trade stability both within the domestic market and international markets. Therefore lessons which can be learned by emerging economies include establishment and sound management of the central bank so that it effectively controls trade through financial institutions. Additionally, a central bank ensures that there is controlled circulation of liquid money within the county and thus prevents occurrence of economic challenges such as inflation which impacts negatively on the trade and economic development of an economy. For example the emergence of state chartered baking systems in the US is attributed to the ability of the country to attract a lot of capital investment (Rousseau and Sylla, 1999, p. 6) A functioning and sound securities market is a prerequisite for rapid expansion of trade and economic growth of an emerging economy (Rousseau and Sylla, 2001, P. 13). It is through this that corporations within the market can be listed within the stock exchange and thus facilitate the trade in securities. As a result of this economic situation, both domestic and international investors will be encouraged to invest in securities and in return cause growth of a country’s companies and businesses. The rise of security markets in the US, for instance, promoted economic development and trade by providing investors with trading opportunities through equity claims and new debt (Rousseau and Sylla, 1999, p. 28). Instability of the security market on the other hand will discourage investors because of lack of security for their investments. It is therefore true to say that the securities markets would play a significant role in promoting trade and economic growth within emerging market economies. The role of financial markets in promoting economic growth and trade is illustrated by the fact that a country’s National Accounting Aggregates are used to measure the rate of economic growth and expansion of trade. For example it is through the rapid increase of the US’s annual GNP that economic growth and expansion of national and international trade was measured (Rousseau and Sylla, 1999, p. 15). The financial systems of an economy play a significant role of demonstrating the financial exchanges within the market and thus revealing the direction of economic growth. Financial records in return enable policy makers and stakeholders in the regulation of financial and trade systems to make informed decisions which leads to enhanced financial transactions within the economy. In the light of the above discussion, it is evident that emerging markets have a lot to learn in relation to the promotion of their trade activities and thus growth of the economy. Financial systems are specifically demonstrated as prerequisites for the expansion of trade and economic growth of emerging economies. For example, the empowerment of individual investments led to the rapid growth of the US after the Revolution. This because business incorporations of individual investors within the US grew into corporations and in return expanded trade leading to significant economic growth (Rousseau and Sylla, 1999, p. 19). It is therefore recommended for emerging economies to ensure that there is proper management of public debt and finances, stability of all monetary arrangements, a properly managed central bank and a sound securities market. More importantly, banking institutions, both domestic and internal, must be present within an emerging economy. It is through financial systems and its proper regulation and management that trade activities and expansion of businesses is achieved. The aggregate of proper regulation and management of financial institutions leads to a rapid growth of the economy. References Rousseau P. L. and Sylla R, 1999, “Emerging Financial Markets and Early U.S Growth”, National Bureau of Economic Research, Working Paper 7448, p. 1-54 Rousseau P. L. and Sylla R, 2001, “Financial Systems, Economic Growth, and Globalization”, National Bureau of Economic Research, Working Paper 8323, p. 1-51 Read More