14th Annual Global Finance Conference, Melbourne, Australia, April 1-4, 2007
14 Pages Posted: 31 Jan 2007
Date Written: April 1, 2007
This paper outlines (i) a theoretical framework for designing institutions to facilitate self-financing economic development and (ii) institutional arrangements for establishing self-financing development. The framework introduces the concepts of: (i) "procreative" assets that generate wealth (ii) "de-generate" productive assets that consume income and (iii) "consumption" assets that also consume income but are manifestations of higher living standards. Self-financing development depends upon replacing the conventional "contrary" process based on reducing consumption to generate savings to finance investment and/or obtaining external development finance with a "confluent" development process. Confluent development allows consumption and investment to increase together with increases in productivity from the new investment creating the savings to cancel the credits used to fund them. Institutional arrangements that allowed the US and Japan to internally finance development at the beginning of the last century provide a basis for considering how credit insurance could be used to introduce self-financing development. The cost of insurance provides a market driven mechanism for allocating credit to the most prospective wealth generating assets. Internally generated finance accelerates development as the cost of servicing external financiers is minimised and the resulting selective monetary regime facilitates economic management. The paper recommends that development institutions like the World Bank change their role from distributing credit to distributing the technology of self-financing development.
Keywords: Economic Development, Loan insurance, Self-financing development, Selective monetary policy
JEL Classification: D24, D31, D92, E20, E58, F30, G22, O12, O40
Suggested Citation: Suggested Citation