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Herbert and Tsegba, 2013). Using 26 and 22 sampled countries from Africa and European Union respectively, this paper examines the concurrent impact of IFRS adoption and FDI inflows on economic growth from the two regional perspectives. Employing panel data over the period 2002-2012, our empirical analysis in the preliminary regression revealed that from Africa’s regional perspective, both IFRS and FDI inversely affect adopted countries’ economic growth which was repeated in their subsequent concurrent regression analysis. This we accordingly ascribed to the fact that IFRS adoption in such countries was meant to protect foreign investors’ interest instead of to have a direct positive impact on economic growth.
Also high profit repatriation in such countries due to loss of confidence in the stability of such countries justifies the inverse relationship between the adopted countries’ FDI and economic growth. Contrary, the positive relationships revealed between both IFRS, FDI and growth justify earlier confidence investors had in the EU’s economy which possibly limited profit repatriation. Subsequently, the positive and negative association between IFRS, FDI and economic growth respectively in their concurrent analysis indicates that regardless of EU’s IFRS adoption, if investors’ earlier confidence in the Union’s economy is tortured, the intended purpose of FDI would not be envisaged. Several policy implications could be deduced from these results. For instance, from African perspective policymakers should not only be interested in adopting IFRS since their adoption without putting measures in place to raise confidence level of foreign investors which is a good sign for cross- border investments and profit retention will in turn leads to high rate of profit repatriation which can have adverse effects on their economic development.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 209 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1
Of the prominent global challenges of the modern day not only for governments but also the poor themselves is the pursuit of a poverty free world or reducing poverty to its minimal level. The rapid increase in poverty levels and the failure to bring poverty levels down to the desired targets, undoubtedly calls for the need for new policies and strategies to be made and the need to exploit alternatives other than the traditionally used methods of fighting against poverty. The rapid growth and development of capital markets and the unique opportunities they provide makes capital markets a worthy consideration as an alternative in the fight against poverty. This article focuses on the unique benefits capital markets provide and the role they play in facilitating superior economic performance and fostering job creation and thus contribute to poverty reduction.
JEL:G200 KEYWORDS: Poverty, Capital Market, Economic Growth
INTRODUCTIONPoverty is one of the most difficult challenges facing the human race in our modern day. The conceptualisation of poverty and the first systematic study of poverty can be dated back into the early 17th century. Of the various research and studies carried out through centuries up to date a common definition of poverty cannot be given because of the multifaceted nature of poverty. As a result a wide range of definitions have been given as to what poverty is or entails. Poverty can be defined as “pronounced deprivation in well being.” The traditional view associates well-being primarily to command over commodities, so the poor are those who do not have enough income or consumption to put them above some adequate minimum threshold. This view considers poverty mainly in monetary terms (World Bank, 2001). The notion of poverty can also be broadened to include vulnerability and exposure to risk and voicelessness and powerlessness. All these forms of deprivation restrict the “capabilities that a person has, that is, the substantive freedoms he or she enjoys to lead the kind of life he or she values” (Sen, 1999).
A capital market refers to a market for securities (debt or equity), which makes it possible for institutions and governments to raise funds. By definition is a market that trades debt and equity instruments with maturities of more than a year (Saunders and Cornett 2012). The capital market today is a reality met in any modern economy. It is a market which is very dynamic, innovative and rapidly adapting not only to the economic environment but at the same time its influential factors. Development of capital markets has significant advantages for countries, of such advantages include providing a more diversified financial system which helps to reduce volatility and fight against the vulnerability to systemic risk. However, the development of capital markets needs to be effected in conjunction with improvements in the existing infrastructure, the implementation of credible laws and regulations, and the adoption of appropriate governance and supervisory structures (Iorgova and Ong, 2008).
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 210 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 In fighting against poverty, a myriad of initiatives and policies has over the years being used. Notable among such policies are structural adjustment programmes and poverty reduction strategies, Millennium Development Goals (MDGs), social protection and inclusion, pro-poor growth, building of capabilities, empowerment and anti-discrimination (Handley, Higgins, Sharma, Bird & Cammack, 2009). The problems associated with these policies and initiatives as well as their inability to achieve desired levels of poverty reduction especially in Sub-Saharan Africa where poverty is pervasive calls for the need to explore alternatives which traditionally are not considered as poverty reduction initiatives or tools. In this regard the unique opportunities capital markets provide in helping to enhance economic growth and thus help to reduce poverty levels makes it worthy of consideration. In this study, we first consider the various perspectives on how to use the capital market to reduce poverty and after that consider how capital markets enhance economic growth through the allocation of capital and risk. By enhancing economic growth through the allocation of capital and risk, capital markets contribute to job creation which helps to reduce poverty levels in the long run.
Perspectives on Using Capital Markets to Reduce Poverty
There are distinct opinions regarding how capital markets can be used in fighting against poverty. These distinct opinions are based on the underlying assumptions of capital market dynamics, usage of capital
markets and targeted outcomes of capital markets (Lawr 2004). Hence there are two distinct views namely:
the pro-market view (which is of the view that the market can be linked or expanded to the poor using the vehicles of micro-finance and ethical investment) and anti-market view (which emphasise on the direct use of market to alleviate poverty referred to as welfare capitalism and subverting the market).
Pro – Market View
Institutionists and Ethical Investor: The pro-market view believes poverty can be reduced by linking or expanding the market to the poor using the tools of micro-finance and ethical investments. This perspective of using micro-financial institutions and ethical investments has been upheld by prominent and powerful institutions such as the World Bank, United States International Agency for Development (USAID), Consultative Group to Assist the Poor (CGAP) and ACCION (Woller, M., Dunford and Woodworth, 1999).
The institutionist approach focuses primarily on creating financial institutions to provide service to clients often not served or considered undeserved by the traditional financial system. The emphasis lies on achieving financial self-sufficiency by expanding services to the poor. The institutionists are of the view that the basic aim of microfinance institutions is to create a distinct system of “sustainable” financial intermediation specifically for the poor in society. The target is to have a large number of profit-seeking micro financial institutions that render high quality financial services largely to the poor a process referred to as “financial deepening”. Institutionists renounce subsidies because of their view of financial selfsufficiency (Woller et al., 1999). Institutionists are of the view that accessing capital markets is vital and overwhelmingly positive because as compared to traditional donor sources only such an unlimited source of capital can exponentially expand micro-finance services and hence lesson poverty significantly (Woller et al., 1999). To further support this claim, the Consultative Group to Assist the Poor (CGAP) estimates the total demand for microcredit at $12.5 billion by 2005 and $90 billion by 2025 (Woller et al., 1999).
“Welfare Capitalism” and Subverting the Market: “Welfare capitalism” is more critical of the market but echoes the views of micro-finance practitioners and focuses on the direct use of the market to help fight against poverty. It is perceived as representing an area in between traditional dichotomies of markets and government in poverty policy: The distinction here lies in the motive of the usage of markets in that the existing, unequal economic market system is subverted as against the notion of either neutral or beneficial GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 211 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 market expansion. Through the application of welfare capitalism the advocates of the poor could exploit the processes and structures of capitalism to fight against poverty (Lawr, 2004).
A Different Market There are also proponents of a different market other than capital markets in alleviating poverty. Although they are not directly opposed to the use of capital markets to address poverty, they are of the view that markets are political and value-laden choice as against being considered as a neutral entity. The market is viewed as systematically unequal, with ethical investing being considered as inherently problematic in that it participates in and thus reinforces the destructive market cycle based on speculation (Lawr, 2004).
Capital Markets and Economic Growth
Economic growth can be defined as the increase in the market value of goods and services produced by an economy (inflation-adjusted) over a period of time. Economic growth is traditionally measured as the percentage rate of increase in real gross domestic product (GDP) of an economy. Economic growth is a powerful instrument for reducing poverty and improving the quality of life in developing countries (World Bank, 1990). A myriad of cross-country research and country case studies provide compelling evidence of how rapid and sustained economic growth is vital to alleviating poverty. Ravallion and Chen by conducting a study using cross-country regressions based on samples from 62 developing countries proved that on the average, a 1 percent increase in per capita income led to a 3.1 percent reduction in the proportion of people living below the conventional $1 a day threshold. They also noted that while economic growth helps the poor in general, it is more beneficial to the extremely poor than the moderately poor (Ravallion and Chen, 1997). A similar conclusion was also reached by other studies using different methodological techniques and this include: Deininger and Squire (1996), Roemer and Gugerty (1997), Timmer (1997) and Gallup, Radelet and Warner (1998) (IPC, UNDP, 2004). Although a number of studies have found economic growth alone as insufficient for enhancing poverty reduction notable among them are: Kakwani (1993) and Osmani (2002), poverty largely tends to reduce when economic growth is on the rise hence the importance of economic growth in poverty reduction cannot be overlooked (Krongkaew, Chamnivickorn and Nitithanprapas, 2006).
A well functioning financial sector leads to an efficient channelling of scarce economic resources to more profitable investments. The positive role of finance in economic growth is admitted by the neo classical economists and the endogenous growth models. (Aghion, Comin and Howitt, 2006). Financial intermediation is viewed to play an important role in economic growth by improving productivity and technical change. Developments in the financial sector influences economic growth by generating and pooling funds; channelling of resources to their most productive uses; the provision of instruments for risk mitigation and reducing inequality (Acquah-Sam and Salami, 2014).
The financial sector pools funds from dispersed households and allocates them to dispersed entrepreneurs.
In this way, an efficient financial sector makes it possible for households to diversify risk and maintain liquid investments normally in the form of bank deposits. Secondly, financial sectors gather information and selects investment projects through monitoring entrepreneurial activities. Such a task cannot be effectively carried out by individuals. Complex economic models stressing the growth-enhancing role of financial intermediation was developed by Greenwood and Jovanovic (1990), Bencivenga and Smith (1991) and St. Paul (1992). A comprehensive research done by King and Levine (1993), using cross-country regressions, found that all financial indicators have strong indicators have strong positive correlation with economic growth. Their analysis concluded that countries with higher indicators of financial development at a point in time subsequently had higher real GDP growth rates, especially in the next 10 to 30 years (King and Levine, 1993).