FM302 Semester 2, 2020

Caution: These are only guiding solutions/hints. Please review

the lecture materials, suggested readings, the instructions given,
and your own reections based on the relevant readings to develop
your answers. All the best.

August 22, 2020

Week 1-2: Tutorial 1

1. Discuss the linkages between Financial development and economic growth.
Financial development includes the expansion of nancial institution's opera-
tion and intermediation role. By pooling (sourcing) funds, facilitating the ow of
funds and mobilizing funds, nancial institutions cost-eectively and eciently
allocate or channel funds to eective uses like `promising' investment projects,
which supports economic activity, and generates employment and income in the
economy.

2. Discuss some constraints of nancial development in PICs.

ˆ Small population and small internal markets resulting to diseconomies of

scale

ˆ Geographical dispersion and isolation, hence low connectivity (not only

technology but markets too)

ˆ Vulnerability to natural disasters and climate change (cyclones, droughts

and rising sea levels)

ˆ Narrow production base and export bases due to smallness and therefore
lack of economies of scale. This also increase reliance on imported goods
and hence current account decit

ˆ Depletion or unsustainable exploitation of natural resources including forestry

products, mineral, energy resources and marine resources.

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 ˆ Dependence on limited number of sectors  huge dependence can be costly
during times of specic crisis aecting those sector. For isntance, the
COVID 19 pandemic has adversly aected tourism sector development
and this has huge repercussions the overall economic activities.

ˆ Weak macroeconomic policy frameworks, which lead at times to unsus-

tainable exploitation of natural resources.

ˆ Capacity constrains including human capital

ˆ Laws and customs often limits the exibility and expansion of product
and factors markets (land tenue).

ˆ High levels of public debt, current account decits and scal decits

ˆ High dependency on inows like foreign aid and remittances. Foreign

aid is volatile, can be costly. Remittances does not enter into productive
activities and largely used for consumption purposes.

ˆ Political economy factors such as periods of political instability or lack of

security hampers investment

Read:

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriengBook44p/M

3. "Financial development inuences factors beyond economic growth". Dis-

cuss.
Financial development can also supporyt poverty reduction through employ-
ment generation, both directly and indirectly through nanciing productive ac-
tivities, including small and micro enterprises. Various intitatives like nancial
literacy, support of gender equaltiy in nancial education and empolyment also
promotes nancial inclusiveness. The reduction in income inequality, promotion
of education human capital development through nancing education are im-
portant positive social development. Activities like nancing small and medium
enterprises, supports generation of new businesses and adds value to existing
economic activity. All these can improve the standard of living of population in
a country. Answers will converge with Question 6.

4. Dene nancial inclusion

See lecture slides and the link to report therein.

5.Discuss some strategies for nancial sector development (refer to

ADB 2001 Report), and eective nancial inclusion in light of the
Maya Declaration
Refer to Financial inclusion report. Read the last section of the
ADB 2001 report.
"The Maya Declaration is the rst global and measurable set of commitments
by developing and emerging country policy makers to unlock the economic and

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socal potential of the 2.5 billion poorest people through nancial inclusion"
(AFI, p2).

ˆ There are for broad areas which are aligned with the G20 Pricinples for
Innovative Financial Inclusion. These are: - to create an enabling environ-
ment to harness new technology that increases access and lower costs of
nancial services - to implement a proportional framework that advances
synergies in nancial inclusion, integrity and stability - to intergrate con-
sumer protection and empowerment - to untilize data for informed poli-
cymaking and tracking results.

ˆ This declaration encourages self-determination, that is each country can

set its own targets since it dier with others in terms of socio-economic and
structural characteristics; peer-to-peer knowledge exchange and sharing
to develop innovative solutions; and develop new forms of international
corporations, which should include private sector participation.

ˆ The declaration aims to promote nancial inclusion, with emphasis on,

technological innovation (mobile nancial services); open regulatory ap-
proach to nancial inclusion thus bringing about greater transparancy;
learning from G20 in terms of the success and progress made towards
nancial inclusion; and recognising the involvement of govenment for con-
sumer protection, and private sectors (market forces) to solve problems of
nancial exclusion.

ˆ In the case of Fiji, the focus will be on: - expanding account ownership
among the underserved; - ensuring the regular use of accounts with nan-
cial service providers including mobile accounts; - enhancing the range and
quality of nancial services and products; - creating an enabling regula-
tory environment to support innovation; - continuing and building on the
nancial literacy programmes; - promoting the development of the Micro,
Small and Medium Enterprises

The RBF's commitments to the Maya Declaration, refer to page 4 of the report
(http://www.pp.org/wp-content/uploads/2016/09/2016-2020-Fiji-FI-Strategy-
Aug26.pdf )
Strategies for Financial Sector Development

ˆ Risk Management should be prioritized.

ˆ develop micronance institutions and eectively intergrate them into for-

mal nancial system;

ˆ promote eective competition for foreign commercial banks by encourag-

ing development of nonbank nancial intermediaries. Government should
allow national providend funds to invest more of their money oshore, to
permit mopping up of some of the excess liquidity in the nancial systems,
encourage competition commercial by commercial banks for deposit and

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 reduce the costs to central banks of issuing intruments to mop-up liquid-
ity. Promote the use of nancial services through the Internet to support
competition.

ˆ Strengthening supervisory systems and developing nancial sector infras-

tructure. Central banks should have autonomy in terms of monetary pol-
icy operation and supervision.

ˆ national provident funds should operate independently of government and

should set rules concerning the nature of permitted investments, and pro-
cedural safeguards to ensure that monies are not diverted from its intended
use.

ˆ capital market development will requie that sound companies acts are in
place; and there should be an ecient mechanism to register companies
and the monitor compliance.

ˆ micronance development will require the building management expertise

and institutional capacity.

Reference: https://www.a-global.org/sites/default/les/publications/a_maya_quick_guide_with

http://www.pp.org/wp-content/uploads/2016/09/2016-2020-Fiji-FI-Strategy-Aug26.pdf

6. Summarize the key ndings of the paper (Reading 3): Beck,

T., Demirgüç-Kunt, A., & Levine, R. (2007). Finance, inequality and
the poor. Journal of Economic Growth, 12 (1), 27-49.
ˆ It was noted that nancial development disporpotionately helps the poor.
Greater nancial development results in faster growth of incomes of the
poor than the average GDP growth, which lowers income inequality.

ˆ Financial development helps the poorest quintile (group)

ˆ 60% of the impact of nancial development on the poorest quintile works

through aggregate growth, and the remainder through reduction in income
inequality.

ˆ Greater nancial development is associated with poverty allevaitions and

especially benecial to the poor. However, the research however does not
provide strategies to foster poverty-reducing nancial development.

7. Excel Exercise:
Collect annual data on a widely used indicators of nancial development, and
economic growth of at least three PICs, from the World Development Indica-
tors (World Bank website). Plot their trends, and perform correlation analysis
between the two. In addition to the above, also collect data on trade openness
(trade as a ratio of GDP) and ination rate, for the selected countries. Deter-
mine the correlation between nancial development and each of the indicators.

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Write a paragraph on what you observe. Now, develop a basic model that you
can estimate (You are not required to do any regression at this point).
Although this exercise can be optional, interested students can explore the
data and develop their analytical skills through carrying out this basic analysis.
Data is easily accessible from the World Development Indicators.
Key statistics that students should extract include:

ˆ Domestic credit to private sectors (%GDP) or M2 (%GDP)

ˆ Ination Rate (%) ˆ Trade (%GDP)

ˆ GDP per capita (constant) either in LCU (local currency unit to USD)

ˆ GDP per capita (growth rate) Selected developing PICs can be considered,
such as Fiji, Solomon Islands, Vanuatu, Tonga, Samoa. For Cook Islands,
similar data can be extracted from ADB database.

ˆ Other sources include UNCTAD and IMF databases. Annual data can be
collected for all the years that are available. Trends can be plotted and
examined. Correlation can be computed for each country paired-statistics
(see EXCEL CORREL function), and reported as a single number. Using
some papers as a guide, students can formulate a basic equation that can
be estimated. Clearly dening the dependent variable and independent
variable will be important. Students are welcome to suggest some method
for estimation, but this is not necessary for this part.

Prepared by the Course Coodinator - Sem. II, 2020; 7 Aug., 2020

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 Week 2-3: Tutorial 2

Task 1. Read the working paper titled: "Remittances vis-à-vis bank credit
and investments in Pacic island countries: The case of Fiji" (Reading 4). Pa-
per link:
https://elearn.usp.ac.fj/pluginle.php/789000/mod_resource/content/1/Remittances%20vis-
%C3%A0-vis%20bank%20credit%20and%20investments%20in%20PICs-FIJI.pdf.

Highlight the key ndings in this study.

ˆ Uses Fiji's household Income and Expenditure Survey (HIES) data (2013-
2014).

ˆ Examines the impact of remittances on bank credit and household invest-

ment in the PIC.

ˆ Denes remittances as: the transmission of money and goods to house-

holds by migrant workers for reasons of altruism, insurance and invest-
ment

ˆ Shows positive impacts of remittances on loan amount and income: nds

that remittances positively inuence the amount of loans that households
obtain. Remittances are important source of invesment in capital markets
and real estate, supporting development in these markets. Remittances
also support consumption.

ˆ Household income is positively associated with bank credit, so is remit-

tances, which could supplement income. Bank credits are more favored in
urban locations (See Table 4).

ˆ Remittances have negligible eect on property income from investment

and the coecients are zeros... ?? (seeTable 5)

Task 2. Read the journal artvile titled: "foreign aid to the pacic: trends and
developments in the twenty-rst century" (Reading 5).
Link: https://elearn.usp.ac.fj/pluginle.php/789000/mod_resource/content/1/remittances%20vis-
%c3%a0-vis%20bank%20credit%20and%20investments%20in%20pics-ji.pdf.

Highlight some key ndings of the paper.

ˆ ocial development assistance (ODA) increased in the Pacic, which co-

incided with scale-up development in the Pacic, and major military in-
terventions in the region.

ˆ Compared to other countries (African nations), ODA to the Pacic is

modest.

ˆ Aid comes in fragments (small slices) from multiple donors, creating high
transaction costs, but this is relatively lower among PICs.

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 ˆ Aid is volatile

ˆ Importance of technical assistance has declined, although spending in this

component remains high in the PICs.

ˆ PICs are somewhat dependent on aid for development and major social
projects.

Task 3. Read the report on: "Ocean of debt? Belt and Road and debt diplo-
macy in the Pacic", (Reading 6.1).
Link: https://elearn.usp.ac.fj/pluginle.php/793390/mod_resource/content/1/Rajah%2C%20Dayant%2C

Highlight the key ndings.

ˆ the paper looks at the lendings from China and Australia to small economies

ˆ China is an emerging nancier for the Pacic under the Belt and Road
Initiative.

ˆ Debt nances development, but attention needs to be on debt sustainabil-

ity.

ˆ Chinese lending is more intense as a share of GDP in smaller economies.

ˆ Australia will need to reverse the current stagnation in its overall aid
budget to continue its impact on PICs.

ˆ Six PICs are currently debtors to China (Cook Islands, Fiji, PNG, Samoa,
Tonga, and Vanuatu)

ˆ Debt sustainability can be an issue.

Task 4. Using your lecture notes (Week 2 and Week 1) as reference (and readings
where possible), answer the following questions:
1. Based on the statistics provided by the ADB 2020 Report (also in the
lecture slides), which countries showed positive growth in GDP in 2019?
2. What are the projected growth rates for these countries for 2020 and
2021?
3. What are some channels of spillover in the PICs?
4. What are some sources of volatility in the PICs?
5. What are some strategies for growth and nancial development in the
PICs?
Read your lecture notes and make short-notes on the above questions.

Prepared by the Course Coodinator - Sem. II, 2020 (16 Aug., 2020)