Developing Nations' Financial Structures and World Crises

As an economist raised to maturity in Pakistan and India and then trained on three continents, Singh maintained a keen interest in the international facets of industrial finance and in investigating how financial institutions and economic development have interacted in low-income nations.

During the 1990s, he was commissioned by the World Bank (Singh 1995, 1997, and Singh and Weisse 1998) to investigate a striking phenomenon. Achieving economic development had become a conscious goal of many nations that were subsisting at low average levels of income per capita as the world began recovering from the Second World War. Some embraced state socialism as a path to development. Studying how these strategies functioned and malfunctioned has been a specialized field of economics. Singh, on the other hand, focused his attention on the nations that had chosen a more or less capitalistic, market-oriented path to development. In an early effort (Singh 1995), he found a noteworthy pattern. Like many other developing nations, India had created public stock exchanges. Expanding his coverage in Singh and Weisse (1998), he observed that there were 7,985 companies listed on Indian stock exchanges, compared to 7,671 in the more highly developed USA, 2,078 in the UK, and 678 in the industrial powerhouse Germany. The creation of stock markets, he noted, had been encouraged by less-developed nations as a part of their economic development strategy. But how did the issuing and trading of common stock affect actual development? How did the processes differ in relation to those in wealthier nations?

In early studies (e.g. Singh 1995) for the World Bank, Singh discovered a surprising propensity after accumulating data on the 50 (later 100) largest listed corporations’ finances in nine (later ten) less-developed nations. Those corporations, he found, tended to rely on external finance—that is, issuing stocks and long-term bonds to finance their growth—much more than did listed companies in the USA and the UK (compare Corbett and Jenkinson 1994). Firms in highly developed economies, in contrast, were said to follow a ‘pecking order’ strategy,^[1] relying first upon internal cash flow from retained earnings and (recognized only in a later Singh paper) depreciation and only then on new bond and stock issues. But in his sample of ten developing nations, the median companies financed more than 40% of their growth from new common stock issues. Why were external sources emphasized more in developing nations? Were there consequences for the success of their economic development efforts?

Singh’s principal explanation for the developing nations’ reliance on external finance issues, in addition to the encouragement that stock markets in those countries received from their national governments, was that at the time of his studies economic development was enjoying a period of unusually buoyant expectations. Money surged into newly established stock markets, including (recognized in later papers) money from first-world investment fund portfolios. This inflow of funds drove stock prices up and hence reduced the implicit cost of capital to the recipient firms, tilting resident firms’ financing strategies towards stock issuance. But he argues (Singh 1997) that it also risked destabilization, in part because Keynes’s ‘animal spirits’ could reverse, shutting off fund inflows abruptly, and also because inward foreign investment decisions were influenced by exchange rate fluctuations. In his Singh (1997) and Singh and Weisse (1998) papers, he opines that the countries he studied would have been better off relying less on domestic and especially foreign stock and bond investments and more, as did Germany and Japan, on fostering powerful domestic banking institutions with detailed knowledge of what was happening in local enterprises and on the patient, stable provision of finance.

Indeed, his fears proved justified. Many developing nations experienced financial crises during the 1990s. Plagued by falling commodity prices, stock prices, and exchange rates, they found themselves unable to meet foreign investors’ demands for cash repatriation. There was intense debate over the right solutions. The prevailing ‘Washington Consensus’ associated with the World Bank and the International Monetary Fund (IMF) (with dissent from economists such as Joseph Stiglitz) was that developing nations should liberalize their financial policies even more, reduce barriers to over-the-border monetary flows, avoid intervention in interest rate setting, and, more generally, curb both government and private expenditures. Indeed, those powerful international finance institutions tried to make support for troubled nations conditional upon the free-market and austerity measures they advocated. Singh adopted a contrary position. He argued (Singh 2002) that developing nations should place restraints upon cross-border financial flows, discourage speculative investment, receive from institutions such as the World Bank and the IMF help in restructuring their debts, and stimulate a return to the strong economic growth that would make them better able to manage their finances. This debate, in which Singh was an incisive participant, was a forerunner of the one that exploded, especially in Europe, following the world financial crisis that peaked in 2008.

Nor was this Singh’s first entry into such debates. When oil prices spiked from $13 per barrel to roughly $34 per barrel in the wake of the 1969 Iranian Revolution, and when Federal Reserve Chairman Paul Volker’s inflation-fighting measures propelled US banks’ prime lending interest rate from 9% in 1978 to 19% in 1982, among other things sharply raising the exchange rate of the benchmark US dollar, developing nations, and especially those in Latin America, were hit by crisis. That time too, the World Bank and IMF preached ‘austerity’, that is, the reduction of public sector borrowing, increased interest rates, and money supply cutbacks. Singh (1986) argued instead for wealthy nations’ forgiveness of international debts, foreign exchange controls to curb capital flight, and Keynesian measures to restore borrowing nations’ domestic prosperity. Another instrument advocated by him to benefit raw material export-dependent nations was the establishment of international cartels to stabilize commodity prices—a suggestion that even today remains seductive though immensely controversial. (For a more sceptical theoretical and empirical precursor, see Newbery and Stiglitz 1981.)

• [1] In Singh and Weisse (1998: 611), the authors attribute the ‘pecking order’ hypothesis to a 1994 paperby Corbett and Jenkinson. In fact, it dates back at least to Duesenberry (1958: 91—97), who adds appropriate caveats recognizing the opportunity cost of retained cash flow.