A proper financialisation? New financing mechanisms for developing countries

Abstract

The common view of critics of international finance is that unregulated capital movements destabilise developing countries. At the same time, financial innovations such as foreign exchange swaps are considered to be ‘shadow banking’ and a part of that destabilising international financial environment. The alternative is a reliance on finance in domestic currency. Here there is a problem that finance is poorly developed in many developing countries. This paper outlines an international financing mechanism, based on foreign exchange swaps, that provides for sustainable foreign finance of lending in domestic currencies in developing countries. Section 2 contains a literature review. Section 3 considers the conditions for stable financing of economic activity. Section 4 outlines a swap-based lending facility that can assist domestic financial development and discusses it form the microeconomic viewpoint. Section 5 looks at some of the macro-implications of such a facility. A final section concludes.