External Financing and the Level of Development: A Conceptual Approach

Abstract

One of the most striking differences between the developing and the industrial countries involves the structures of their financial systems. As per capita incomes increase, financial structures expand rapidly. Thus, in the developing countries, the ratio of money to national income ranges from 10 per cent at low levels of per capita income to 30 per cent at higher levels. Similarly, the ratios of financial assets to national income and of indirect finance to direct finance are also significantly higher in the industrial countries than in the developing ones. The counterpart to a modest financial structure in countries with low levels of per capita income is extensive reliance on self-finance. Increases in these ratios, as per capita incomes increase, are associated with changes in the institutional financial structure; banks and non-bank financial intermediaries are relatively more important in the economies of the industrial countries. Moreover, the facilities for trading in various risks, including various business risks, are much more comprehensive in the industrial countries than in the developing ones.