The present regarded industrialized countries seem to enjoying benefits that their expansive economies offer. The first world countries have continued to experience better economic growth because of the influence of stronger and well established financial and security market. Thus, this research paper in it’s entirely, considers lessons that emerging financial markets can learn from developed and developing countries’ financial institutions. However, the basis of the paper is on U.S, England, Japan and German’s financial institutions metamorphosis into present efficient ones. These occurrences precede the present development within these countries. Economic historians continue to neglect the importance of financial institutions. However, Rousseau and Sylla (1999), show that there are important lessons that emerging nations and financial systems can learn from the impacts of both financial and securities towards growth and development (Rousseau and Sylla, 1999, p. 2).
Financial market revolution in the developed countries
Before financial and security markets developed between 17th and 18th century, in the counties discussed in the case study, there was more development in agriculture, rail systems, and canals. All these happened because of the innovations in technology. Though these economies experienced substantial output growth, this was at lower level in comparison to emergence of good financial infrastructures. The focus on the broader aggregates in economy helps to uncover the role offered by the financial institutions towards realization of rapid growth. This comes with the smaller commercial, service, and the producing sectors. Varying from the agricultural contribution, the sectors stated experienced rapid growth in 1790s (Rousseau & Sylla, 1999, p.2).
Emergence of the financial sectors
Following any standard as stated by Rousseau et al. (1999, p. 4), the current modernization by developed nations, the rapid growth of capital with assistance from banking institutions, and the security markets have contributed to mobilization of capital from the domestic and foreign consumers and those who would like to invest their resources in order to get more returns from their investments. As noted by Rousseau et al. (2001, p. 23), before 17th century, there was no well developed financial systems within the countries under study. This made the country governments to experience higher amounts of foreign debts after war. The money stock existing within the countries were in form of fiat paper money; foreign coins that had been invested by the foreign citizens in U.S and other three states (Rousseau et al. 1999, p. 12). The poorly developed financial infrastructure within these states, same as in the present emerging nations, failed to mobilize most of the resources that were in the hands of the private and public.
To overcome these challenges, the governments were forced to come up with strategies that could ensure well structures banking models. As described in their report, such a better system was first developed and implemented in the republic of Dutch in early 17th century. However small it was by then, it enabled its government to gain power both in economics and political undertakings (Rousseau & Sylla, 2001, p. 8). Based on the historical perspective, the report shows that a better financial model should have five key attributes. As mentioned by (Rousseau & Sylla (2001), it should have a better mananagent of its public and debts finances. The second aspect considers arrangements that ensure stability in monetary policies. Thirdly, the government should create incentives that help in creating domestic and international banks. Fourthly, the system should ensure that there is creation of an independence central bank for the state. This helps in setting and dealing with the economic policies that create desirable economic conditions in the economy. The last aspect under consideration is the development of a well established security markets by the government.
Once the government adopts and implements the above mentioned issues in relation to banking and finance, mobilization of the resources in the domestic and foreign hands becomes easier (Rousseau & Sylla, 2001, p. 5). In the context of globalization, which refers to offering of financial assistances across the border and aided flow of capital, international banking and increased crisis within the financial markets and integration of the financial systems, the lessons learned from the mechanism will also assist governments of the emerging nations to facilitate growth prospects. With better laid down economic policies, model adoption by such states will ensure that foreign investment is attracted into the economy.
Stable financial systems
The first emphasis is placed on the public finance for historical justification. In the current history of most developed nations, good financial institutions came up with the need to offer finances to a state. This was to finance wars that were happening at the time among the nations. Sound finance systems contained strategies set by the government that ensured it’s spending and expenditures were controlled (Rousseau & Sylla, 1999, p. 40). Adequate revenues were raised to make sure that all expenses are funded in an efficient manner. Furthermore, the realizations made from the strategies used by the developed nations were inclined to the urge of raising funds for internationally and domestic use. All these resulted from creation of systems that were given mandate to mobilize capital for productivity of these states (Rousseau & Sylla, 2001, p. 12).
Stability of money is more emphasized in relation to functions that money plays in the economy. This ranges from standard of payments, medium of exchange and as a store of value (Rousseau & Sylla , 1999, p. 23). All the functions if not well managed, more of the impacts will be on the country’s currency either through devaluation or inflation.
Creation of more banking infrastructures in an economy helps in diversification where both domestic and international financial institutions are created simultaneously. Through creation of monetary base as a model used by major developed states like England and Germany, creation of deposits, loan advancement, and issuance of their currency in the market becomes simple. Issuance of loans is done by allowing users to access the funds in a form of either mortgage financing or offering credits to the entrepreneurs (Rousseau & Sylla, 2001, p. 7).
A mechanism to develop an independence central bank by emerging economies should also be emulated from the developed states discussed. Upon the establishment of the central bank, its main obligations should be to monitor and regulate all operations undertaken by smaller financial institutions. This is to ensure that any possible problem that may arise are moderated and possibly prevented from occurrence. As a lender of the last resort, the central bank will also ensure that smaller banks will be in a position to access funds in case they run out of stock within their reserves.
The last factor to be considered and adopted by emerging financial markets is based on the security market (Rousseau & Sylla, 1999, p. 23). As reported by Rousseau et al. (2001, p. 44), before the developed countries’ governments gained development and growth in their economies, they had poorly developed securities in the market. Most of securities in the U.S economy sprung up overnight in most of cities in the early 90s. They were mandated to offer regulations in trading activities, new debts, and payments of claims. However an alternative to these is liberalization of the intermediate institutions like smaller banks to help in issuing public and private debt securities (Rousseau & Sylla, 2001, p. 8). The specialized institutions, through the mandate by the government, will participate in selling of securities to the market. As a result, this will make it easier in availing of funds to the public for investment which is a key indicator of growth. As stated by Rousseau & Sylla (1999), “in its narrow concept, investment assists in the development of the nation more that output experienced in the economy” (Rousseau & Sylla, 1999, p. 17).
Conclusively, the paper has considered in greater depth, steps that the developed financial markets adopted when they were at the same position as current underdeveloped nations. The impressive achievements of their financial systems were from continued innovations and articulations that arose due to demand from the government to implement desirable impacts in their economies. Through adoption of various models in their economies, these states were able to amass more capital from the public and foreign investors. As a matter of fact, modern developments being experienced in these economies are as a result of remodeling taken in their financial systems.
Rousseau, P & Sylla, P 1999, Emerging financial markets and early U.S growth, Web.
Rousseau, P & Sylla, P 2001, Financial Systems, Economic growth, and Globalization, Web.