Question

. Describe the typologies of private capital flows and the rationale for the existence of a ‘hierarchy’ of private capital flows to developing countries.

. Discuss the difference between a bank-based and a market-based financial system, and state whether the financial systems of developing countries are generally characterised as bank-based or market-based. Does the structure of the financial system affect the nature of financial relationships?

Answer 1

Describe the typologies of private capital flows and the rationale for the existence of a ‘hierarchy’ of private capital flows to developing countries.

The types of private capital flows are Foreign Direct Investment and Portfolio investment. Both of these Investments are essential for a country to develop. Developing countries tend to attract private capital flows in various sectors of economy. Investment promotion authority has to design a system to evaluate the private capital flows into the country. Poor income generating economies may require Investments in infrastructure, health, education etc The flow of private capital flows must be through proper hierarchy designed by the countries. Otherwise the analysis of private capital flows will become difficult.

Discuss the difference between a bank-based and a market-based financial system and state whether the financial systems of developing countries are generally characterised as bank-based or market-based.

In Bank-based financial system, the banks play a major role in savings mobilisation, supervising the corporate sector and risk management in an economy. In a Market-based financial system securities market along with the banks attract savings to corporates, risk management and controlling of corporate sector in the economy.

The financial systems of developing countries are generally characterised as bank-based. Because bank-based system helps to reduce the inequality in the developing countries.

Does the structure of the financial system affect the nature of financial relationships?

Yes, the structure of the financial system affects the nature of financial relationships. Bank-based financial system enhances the income distribution in developed countries and Market-based financial system helps to reduce the inequality in the economy. In Market-based financial system, the stock market will be active since the people in the developed countries are rich. In Bank-based financial system the volume of financial services will be more.