ECONOMIC DEVELOPMENT AND FINANCIAL VARIABLE

Pierangelo Dacrema

Professor of Economics at the University of Calabria

The purpose of this speech is to focus the attention on the relationship between economic development and financial variable, that is on the role that the financial variable has in the economic development processes.

The speech consists of three parts.

In the first part, the introductory one, I will look at the topic from an historical point of view.

I will try therefore to shortly recall the experiences of some countries in order to highlight if, when and where the financial variable has turned out crucial for the development.

In the second part I want to develop - in a canonical way - the topic associated with the relationship between economic development and financial variable.

This part will be the core of the speech and in order to conduct it I will also use some theoretical instruments useful to demonstrate that exists a direct relationship among development, risk and financial variable.

In the third part of the speech I will demonstrate, using a methodology based on some examples, the limits of financial variable and I will draw some conclusions on the secondary role that it can assume if it is not accompanied, and in some cases preceded, by a very strong decisional fact, by the gesture that gives a sense to financial variable itself.

The historiography of the western economy is rich of examples that remind us of the importance of financial variable for the development of the economic systems, but it is equally rich of examples that go in the opposite direction.

The most famous example in this last sense, and perhaps also the most important, is the case of England, whose face has been radically changed from the industrial revolution. English industrialization has happened without the intervention of the banks and the economic development of the country has happened aside from its financial superstructure. The English economy, in other words, has grown managing (doing) without financial variable, and development and change have been financed by enterprises self-financing.

An example that goes in the opposite direction is the case of Italy. The economic development of Italy could not never have completed itself without the participation of the banks that have financed it. The great banks of the time - we are speaking about the twenty-year period between the nineteenth and twentieth century -, operating according to a specific model s-called "mixed bank" (of German origins), have financed the industry, industry that was still rising and, therefore, weak from a financial point of view. The financing consisted in supplying the enormous amount of capital necessary to the take over by supplying long-term loans and by underwriting securities.

Italy, as many other countries (and for example Germany), had a very big delay (of nearly one century) compared with its main competitor (England of course). It was necessary to accelerate the economic development in order to plug (fill) a gap that otherwise it would have risked to become more and more large.

Compared with the case of England the cause-effect relationship is reversed in the case of Italy: while in England the industrial development (happened aside from financial variable and, therefore, from the participation of the banks) has determined the development of the financial superstructure, in Italy the financial superstructure has permitted the industrial development by supplying capital and funds for it.

F = TOTAL BROKERAGED FUNDS

R = RISK

S = RATE OF DEVOLOPMENT

Before going through the core of the speech it is necessary to clarify what we mean for financial institutions and financial intermediaries. The meaning that we want to give in this case is wide: anyone who hold financial variable, that is any subject that, as a consequence of a delegated relationship, is called to transfer financial resources from one or many subjects to others. So, the financial intermediary can be a very typical subject (such as banks) as well as public agencies whose mission is however to transfer and allocate financial resources.

Now we can pass thorugh the core of the speech...

Increase and development of economic systems are uneven ways, they are based on change. Any change is risky, dangerous himself, because it is characterized from processes with uncertain outcomes. The financial institutions mission is to finance the change, by assuming themselves risk.

A graphical synthesis will help us to highlight the relationship among the considerate variables, also by defining the right direction of them.

The only below hypothesis is that exists a typical constriction that is very typical of the economic-financial contexts; it consists of limited possibilities of exchange between subjects in surplus and subjects in deficit because of the informational asymmetries that make capital markets imperfect and because of a series of other ties, logistic and administrative, that

prevent the conclusion of agreements between the primary counterparts (stockbrokers).

The used concept of brokered funds is wide and it not only refers to the credit intermediation but also to the participation of all the financial intermediaries active on the market (therefore public agencies included) and that operate according to the logic of delegated investor.

The risk concept, in a neutral meaning, refers to the phenomenon associated with the collection and the investment of resources (that can be represented from deposits in the case of the credit intermediation, from fiscal revenues (taxes) in the case of the intermediation operated from public agencies) intended to finance activities and ventures characterized from

a more or less uncertain outcome.

For development rate, we mean a general positive dynamic of a series of economic indicators, firs of all gross domestic product.

The figure shows the existence of a direct linear relation between risk and financial variable and, therefore, between risk and development.

Function R=aF expresses the sensibility of R to the variations of F according to a parameter a measuring the inclination of the line. The measure of a depends on many conditions such as the backwardness of the economic system, the spread and quality of the entrepreneurship that distinguishes it, its degree of exposure to specific economic conjunctures.

On the other axis, function S=0R expresses the attitude of an economic system to grow in function of the available resources and therefore of the risk. P measures the ability of financial institutions in leading and managing resources for achieving economic development. P is a synthetic expression of intermediaries' operational and allocative efficiency and their suitability to carry out their mission that consists of being intelligent and effective filter regarding of the financiable initiatives. If the level of R is high this fact will affect S in a positive way: to a greater total risk, that directly depends on financial variable, corresponds greater potentialities of development.

The model just examined can be useful to explain, form a theoretical point of view, the existing relationship between financial variable and economic development. From a logical point of view that could carry to identify the financial variable like crucial factor of development. This is true but not in an absolute sense.

The financial variable can be necessary condition but for sure is not sufficient condition for development of the economic systems. In other words, so far we have explained the potential of financial variable in the economic development, from now on I will try to emphasize its limits... and now I am going to pass on the conclusion of my speech.

In order to demonstrate the limits of the financial variable I will use three examples: the first example is the case of the City of Cosenza, the second example is the case of Calabria Region, the third one is the case of Ireland.

The City of Cosenza has been governed in last the eight years from a committee led by the mayor Giacomo Mancini. This Municipality has completely changed - in a positive way - the face of the city by carrying out many works. The mayor has decided to carry out the change of the city. Only subsequently he has been worried about searching the necessary financial resources. Only subsequentely he has gone to the search of funds to finance works. The example demonstrates as in presence of well-working decisional mechanism financial variable can assume secondary meant and importance. Sometimes financial variable can be just an instrument.

The second example it is the case of Calabria Region. Since Calabria is included in objective 1, the Region has great financial potential because national and most of all European Government assign to Calabria a very big amount of funds (I mean structural funds). Its potential in terms of available financial resources are therefore enormous.

Well, both in 1994-99 and 2000-2003 period , Calabria has not met its target. Calabria has demonstrated to possess insufficient skills, in other words the Region was not able to spend the available funds.

This fact can be explained by a lack of ability in programming development, in strategic thinking, and most of all in turning ideas into action. The example demonstrates as the availability of financial resources can reveal useless in absence of capacity of action.

The third example is the case of Ireland, country in which the development has been possible thanks to a decisional and acting ability that has been transformed in ability to expense by adequately (correctly) managing the financial variable.

All the cited examples emphasize the difference that exists between power of the money and power of the gesture: it is the gesture that gives a sense to the money, it is the gesture that produces wealth, the money is a following fact.