The Hindu Business Line : Weakness in infrastructure can frustrate supervisory oversight

YOU don't need to be reminded that "in theory, private capital should flow to capital-scarce developing countries and help smooth spending." But it may come as a jolt to many that "in practice, there have been large net transfers from developing countries to developed ones, and private flows have been very volatile."

This contradiction stares from the pages of the UN's World Economic and Social Survey 2005: Financing for Development, from Academic Foundation (www.academicfoundation.com). The report, running to about 200 pages, is divided into six major chapters — mobilising domestic resources for development, trade, international private capital flows, official development financing, external debt, and systemic issues.

Contrary to what most of us assume, "causal links among savings, investment and growth are less clear". It is economic growth that lifts domestic savings rather than the contrary, suggests the report, citing empirical evidence from developing countries. "Similarly, it is often growth that leads to increased investment, but a high investment rate is essential to sustaining a dynamic rate of growth."

Developing countries need to pay attention to three aspects of domestic financial system, says the Survey. One, long-term financing, which is usually scarce because "creditors prefer to offer short-term financing so that they can monitor and control borrowers". Two, `inclusive financing', to ensure that financial services reach a larger proportion of the population. Millions of poor people without access to, or lacking trust in, financial institutions save and lend in small quantities through informal institutions such as ROSCAs (short for rotating savings and credit associations).

The third aspect is prudential regulation and supervision, to ensure a sounder financial system. But this can't exist in a vacuum, points out the report. "For financial regulation to be effective, there should be a solid infrastructure." Does that mean buildings? Far from that, we need `sound and sustainable macroeconomic policies', plus a host of things that the report is quick to state. Such as: a legal and judicial framework, particularly workable bankruptcy arrangements; reliable accounting practices for valuing financial assets; dependable statistics; procedures for efficient resolution of problems in financial institutions; appropriate safety net; effective payment and settlement system; and sound principles of corporate governance. "Weakness in the underpinning infrastructure can render useless the most careful supervisory oversight," cautions the report.

Returning to the point on private capital flows we started with, the Survey underlines the damaging effect of `boom-bust cycles'. Crossover investors, including institutional investors, "who invest in emerging market debt as a supplement to their traditional portfolio of mature market debt", have made more funds available, but they can generate greater volatility. Another double-edged sword is derivatives; these "add leverage to markets" but can exacerbate volatility. The Survey concedes, "It is difficult to regulate derivatives... partially because offshore markets are hard to control." Educative read for professionals interested in a macro view.

Tips for entrepreneurs

LOOKING for `a complete guide for starting and running your small business successfully'? Here's just that from T. Gopinathan (gopinathant@gmail.com) in the form of an e-book titled Small Business Success Workbook. To become an entrepreneur, you need to be a `self-starter', advises the author, right at the start. "A self-starter is a person who knows what she or he wants, and goes about organising what is needed to get it," unlike an employee who depends on his boss to tell her or him what to do and how to do it.

"Often people just jump into ventures hoping to learn as they go. While this approach is definitely better than doing nothing, it is a wasteful approach. You would waste a lot of time and money during the trial and error process. There is also the danger that if you have jumped into a wrong business, problems dominate your mind so much that you are not in a state to observe and learn." Useful caution, that is.

Managing a small business is not rocket science, assures Gopinathan. "It is applied common sense. You go out and observe how things are done. Then you adapt these to your particular business." Helpful inputs.

BooksOfAccount@TheHindu.co.in

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