The aim of this essay is to present the purpose and exigency of financial aid for developing countries and new approaches by which financial aid can lead to
sustainable growth. More than three-fourth of the world’s people live in
developing countries, but they enjoy only 17,3 % of the world’s income – while the richest 20% have 82,7 % of global income. (IMF 2001)The definition of Less Developed Countries (LDC) is not very precise. The common approach to define a country as LCD is in regarding the economy. A big part of the economic issues are a result of low creation of value (productivity).
Due to major parts of inhabitants of LDC being employed in the primary sector,
in which economically very little value can be created. The exports are basically generated by the primary sector (i.e. agricultural goods or natural resources). The strong commercial adjustment to industrialised countries has, among of others, its routs in colonialism. Most aid is regulated by the United Nations (UN) which is a world council of different nations. The UN also differs between LCD and LLCD (Least Developed Countries) which are a group of countries within the United Nations Organisation (UNO) which are ever poorer than LCD. Due to relatively unsuccessful efforts to reduce poverty in the past a new idea came up. Unfortunately there is no measurement like return on investment at aid. This essay will show were the problems are and what is done to solve them more sustainable than in the past. One new approach is the usage of Microcredits which I will give details about after explaining the initial position of the problem.
Table of Contents
1. Characterisation of the Problem
1.1. Do not measure a country by its income alone
1.2. Growth vs. Development
2. Governmental Options to form a Generative Economical Environment.
2.1. Monetary Policy
2.2. Role of Central Banks
2.3. Exchange Rates
3. Microcredits
3.1. Origin and Development
3.2. Function
3.3. Micro Financial Establishments
3.4. Downsides of Microcredits
4. Summary
Objectives and Core Topics
This assignment examines the role of financial aid in promoting sustainable economic growth in developing countries, specifically evaluating microcredits as a viable alternative to traditional development approaches.
- The distinction between economic growth and genuine human development.
- The challenges faced by governments in establishing a stable macroeconomic environment.
- The evolution, operational mechanisms, and impact of microfinance institutions.
- Potential risks, such as foreign exchange exposure and political dependency, associated with international microcredit funding.
Excerpt from the Book
3.2. Function
To motivate the applicants for the credit in a socially acceptable way to an unsolicited repayment, special credit techniques are used e.g. • Graduating clients i.e.: grant a small loan today and in crease the loan amount if good repayment is achieved. • Group lending i.e.: Five to six applicants for the credit keep a credit alternating and vouch for each other. • Short repayment intervals to the cash flow of the enterprise (also weekly or monthly repayment) • Social pressure if a single repayment is missing. • Focusing on women: Many micro financial organisations only assigning credits to women, since on one hand women in many countries are not considered as creditable, on the other hand due to the family responsibility they have a particularly high motivation for long lasting investments. • Intensive loan maintaining: clients are visited regularly by the loan officer to monitor enterprise performance and repayment strategy.
In compliance with these rules and increasing professionalism good micro financial companies have repayment rates around 95 per cent. Interest rates reflect the close contacts the Microfinance institutions have to their clients. Interest rates generally lie above 20% per annum. This explained with the higher labour costs, which are caused by controlling and working out Microcredits (Ledgerwood 2001). Even if this may seen very high for the poorest, it allows them to build an economic existence opposed to not having access to any financial service. To show the effects of Microcredits I attached a table to the appendix which compares different authors with different variables (Appendix 1).
Chapter Summary
1. Characterisation of the Problem: This chapter introduces the disparity between global wealth distribution and emphasizes the necessity for new, sustainable financial aid approaches.
2. Governmental Options to form a Generative Economical Environment.: This chapter discusses the macroeconomic prerequisites for development, specifically focusing on monetary policy, central banking, and exchange rate stability.
3. Microcredits: This chapter analyzes the definition, history, functional techniques, institutional structure, and inherent risks of microcredit systems.
4. Summary: This chapter concludes that while microcredits are effective tools for poverty reduction, they are not a universal cure and require a degree of financial independence to be successful.
Keywords
Microcredits, Sustainable Growth, Developing Countries, Financial Aid, Monetary Policy, Central Banks, Poverty Reduction, Economic Development, Microfinance, Informal Sector, Purchasing Power Parity, Dollarization, Loan Repayment, Millennium Development Goals, Financial Inclusion
Frequently Asked Questions
What is the central focus of this assignment?
The paper explores whether microcredits provide a practical and sustainable solution for fostering economic growth within developing nations.
What are the key thematic areas addressed in the work?
The assignment covers economic definitions of development, the impact of government monetary policy, the mechanics of microfinance, and the challenges of international refinancing.
What is the primary research goal?
The goal is to determine if microcredits can successfully address the limitations of traditional financial aid by empowering individuals in the informal sector.
Which scientific methodology is employed?
The author uses a literature-based comparative analysis, synthesizing existing economic theories and empirical impact studies from various development organizations.
What is discussed in the main body of the text?
The body analyzes the transition from traditional aid to micro-financing, explores specific lending techniques, and outlines the risks associated with currency fluctuations.
Which keywords best characterize this research?
The paper is centered on terms like Microcredits, Sustainable Growth, Poverty Reduction, and Financial Inclusion.
Why are microcredits often specifically targeted at women?
Microfinance institutions target women because they often lack access to traditional credit, yet they demonstrate a higher motivation for long-term investments due to family responsibilities.
What is a major downside of microcredit programs mentioned in the study?
A significant risk is foreign exchange exposure, as many microfinance companies refinance in USD, shifting the risk of currency devaluation onto the individual borrower.
How is "Micro" defined in the context of this paper?
It is defined either by loan size (equal to or less than the average GDP per capita) or by the clientele served (micro-enterprises in the informal sector).
- Quote paper
- Honours Bachelor of Arts Business Management Jonas Schirm (Author), 2005, Do Microcredits offer a practicable solution for sustainable growth in the economies of developing countries?, Munich, GRIN Verlag, https://www.grin.com/document/52358
