Reclaiming Development by Chang Ha-Joon; Grabel Ilene; Wade Robert H

Author:Chang, Ha-Joon; Grabel, Ilene; Wade, Robert H.
Language: eng
Format: epub
Publisher: Zed Books
Published: 2013-08-15T00:00:00+00:00

9.2 Foreign Bank Borrowing

The neoliberal view

Foreign bank loans carry numerous macro- and microeconomic benefits.

The resources provided by foreign bank loans supplement the pool of capital that is made available by domestic lenders and savers. Foreign bank loans thereby provide the opportunity for levels of investment and economic growth that are higher than would otherwise be possible in the absence of this resource. Additionally, there are other developmental benefits associated with foreign bank borrowing. Foreign banks often extend credit at lower cost to borrowers than do domestic banks. These lower capital costs may translate into higher levels of investment and growth. The competition between foreign and domestic banks may also force the latter to offer loans at lower rates and more generally rise to the efficiency and service standards of their foreign competitors. Domestic consumers and firms thereby benefit from the competition between foreign and domestic banks.

Foreign bank borrowing also acts as a disciplining device on the macro- and micro-levels. On the macro-level, foreign bank borrowing rewards governments and firms for creating a sound financial environment and penalizes them for making poor choices (through the withdrawal of loans or the increase in interest rates). Foreign bank borrowing therefore reinforces the necessity for appropriate economic (and other) policy reforms. On the micro-level, the performance of domestic firms is enhanced by their relationship with foreign lenders. Domestic firms that borrow from foreign lenders must meet the stringent standards for creditworthiness and management competence that foreign banks impose on borrowers. By encouraging an upward harmonization of operating and management practices, foreign bank borrowing enhances economic efficiency in developing countries.

Rejection of the neoliberal view

A good deal of foreign bank borrowing has fuelled speculative bubbles and overinvestment, thus aggravating financial fragility.

The capital made available by foreign banks will only promote productive investment and economic growth if these funds are allocated appropriately (in a developmental sense). This has generally not been the case. In countries throughout the developing world, private borrowers use foreign bank loans to finance all manner of unproductive or wasteful activities.

During the speculative bubbles that are commonly inaugurated by financial liberalization, a large proportion of foreign bank loans finance forays into speculative commercial real estate development and stock trading (see section 9.3 below and Chapter 10). This was certainly the case in many Latin American and Southeast Asian countries following financial liberalization. In addition to providing fuel for speculative bubbles, foreign bank borrowing has often financed investment in sectors where there is substantial overcapacity. In the years leading up to the Asian financial crisis, foreign loans financed a good deal of overinvestment (e.g. in the production of automobiles and electronics). Excess capacity (which is the outcome of overinvestment) places downward pressure on prices and export earnings.

In the absence of government measures that influence the allocation of loan proceeds, there is no reason to expect that foreign loans will finance investment projects of the highest developmental or social value. It hardly matters if foreign loans complement the scant volume of domestic loans if these loans are used for developmentally unproductive purposes.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.