An Analysis of Financialization's Impacts in the Ethiopian Economy

This essay provides a comprehensive analysis of financialization in Ethiopia, exploring its multifaceted impacts on the nation's economy. The introduction defines financialization and its influence on economic policy, productivity, and wage dynamics. The essay then delves into the positive effects, such as the development of financial systems, increased availability of funds, and the facilitation of capital flow from developed nations. However, it also examines the negative impacts, including the potential for financial crises, market imperfections, and the influence of external factors. The essay uses economic theories and research to support its arguments, providing a balanced perspective on the role of financialization in Ethiopia's economic landscape. The conclusion summarizes the key findings, highlighting both the benefits and drawbacks of financialization for a developing country like Ethiopia. The essay is a valuable resource for students seeking to understand the complexities of financialization and its implications for economic development, and is available on the Desklib platform, alongside other past papers and assignment solutions.

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FINANCIALIZATION IN ETHIOPIA
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INTRODUCTION
Financialisation is explained as a process in which financial institutions, financial elites,
and markets gather mass influence over economic policy and its yields. Based on this
explanation, its’ results are mainly to increase the productivity in the commercial sector in
relation to the actual one. In addition, shift earnings from latter sector to the former sector, and to
raise the output gap of dissimilarity. Besides, financialization increases wage sluggishness.
Moreover, financialisation works in three different schemes: alter the organization and the
functioning of economic markets, variations in the operation of non-financial groups with
prolonged recession. Financialisation attracts policy concerns from the public at macroeconomic
level as well as the microeconomic levels (Aalbers, 2015, p. 70). Previously, the period of
financialisation has remained related to tepid actual economic development whereby progress
displays a slowing trend. Financial fragility is also indicated to be constantly increasing.
However, there is no any doubts that the impact of the financial sphere has intensified
rapidly especially in the recent years. Nevertheless, there is much effects of that influence which
is repeatedly debated in the global world. Besides, the aftermath of the financial crisis has led to
several discussions of the phenomenon of the so-called financialization. Furthermore,
financialization has led to a snowballing impact of financial firms on the activity of all
businesses entities which includes the emerging threats linked with dynamically developing
financial markets. (Dore & Ronald, 2017, p. 92) Also, the growing significance of financial
themes. Therefore, in light of such issues which appear in all economic activities, there is a need
for evaluation and a summary of the role of financialization in the global world today.
Financialization portrays both positive as well as negative impacts on the stability of the entire
economy. In addition, financialization shows the functioning of various types of markets, state

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institutions, behavior of households and activities of enterprises. The following context shall
cover the impact of financialization in one of the Africa’s poor country, Ethiopia.
To begin with, the following are the positive impacts of financialization;
One of the positive impacts of financialization is that, it can lead to the development of
financial system. Hence, a well-functioning financial system enhances and provides supports in
form of funds to individuals who wish to borrow the funds. The individual borrowing the funds
may be comprised of the Ethiopian administration or the Ethiopian firms and households.
Mostly, these borrowers are have a productive investment opportunities. Moreover, financial
firms do not frequently operate as they wish (Epstein, 2016, p. 84). The reason being, the lenders
confront challenges of asymmetric information which on the other hand can lead to adverse
moral hazards and selection.
Another positive impact of financialization is that it can help improve the functioning of
the financial system via the key channels. For instance, financialization can increase the
availability of the funds being provides to the borrowers (Polis, 2014, p. 68). In addition,
financialization can advance the financial infrastructures hence reducing the problem of
asymmetric information. Therefore, as a result, financialization can potentially decline adverse
selection and moral threats thus enhancing the availability of credit in developing countries such
as Ethiopia.
Moreover, financialization in a financially integrated world can facilitate the flow of
funds freely from nations with more than enough funds to countries that are in need of such
funds. Developing countries such as Ethiopia are usually in need of such funds so they can
develop their infrastructures so as to increase efficiency of the administration’s spending

FINANCIALIZATION IN ETHIOPIA 4
(Epstein,, 2012, p. 125). Therefore, both Ethiopian individuals and foreign institutions might
provide capital in terms of funds thus enhancing development of the nation hence curbing the
high rates of poverty. In addition, the flow of capital from the more developed nations is usually
reflected in the large current accounts deficits typically witnessed in many developing nations
such Ethiopia. For instance, Ethiopia is sometimes affected by severe weather conditions leading
prolonged droughts. Severe droughts have always negatively impacted the Ethiopian natives due
to lack of necessities such as food and water. But with these enhanced capital transfer, the funds
can be used to buy foods from well developed countries and provide it to the most affected
community.
In addition, financialization facilitates new channels of capital to these developing
countries hence positively impacting the nation. Therefore, new sources of capitals and funds
provided by the most developed nations, become even more available. Besides, new and
increased sources means that domestic borrowers can frequently borrow from both local and
foreign sources hence impacting the economic status of the nation (Kripper, 2013, p. 53). The
availability of capital from the new sources means that the market discipline is now stronger both
at the financial factor level and the macroeconomic level. Therefore, foreign and domestic
investors enforces the market discipline on both private and public debtors. In addition, foreign
capital is particularly effective in imposing this kind of market discipline due to its nature.
The following context regards to the negative impacts of financialization;
Despite financialization having positive effects, it also has negative impacts on
developing countries such as Ethiopia. For instance, this theory dismisses the challenges of
financial thought using Friedman's (1953) stand that assumption is leveling. In the thought of
Friedman, market charges are regulated on the foundation of commercial essentials (Froud, et al.,

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2016, p. 78).When the prices redirect from those essentials that makes a profitable opportunity.
Speculators then get involved and purchase or vend, directing charges to the range acceptable by
fundamentals. Raising the amount of merchants and the intensity of tradeoff is also viewed as
refining commercial market outputs. Improved trade mass escalates market liquescence so that
the prices in the market are not much prone to little disorders by single marketers. Lastly,
macroeconomic concept also supports the hopeful view of commercial markets through q-theory
"q" stands for the ratio of price of the capital in the market to its replacement cost; this q-ratio
allegedly equips firms signally to constantly direct the investment and wealth accumulation.
(Froud, et al., 2016, p. 144) Whereby, when q is bigger than unity, the price in the market is
more than the replacement price. That signals that the investment is in unreliable source and
more profitable enterprise chances are there, and the investments respond by capitalizing.
In addition, another negative impact of financilization on developing countries such as
Ethiopia is it can lead to crises. The crises are attained at especially if there are imperfections in
the intercontinental financial markets. Therefore, the imperfections of financilization can
generate herding behavior, financial bubbles, crushes and speculative attacks. Literature is
developing due to the wave of behavioral finance attitude (Martin, 2013, p. 54). For example, the
rational anticipations theory appreciates that participants in the market can rationally get
involved in bubbles if they expect the prices to rise.it is also argued that risk-impartial investors
that occupation intensely on noise can market function efficiently for instance, Hirshleifer
suggests that the commercial market progress can be generally useless if the functionality is the
result of different subject existing opinions, making it more similar to preferring betting on a race
course to productive moment.in this argument, the race will consume value economic resources
in return for nil productivity (Froud, et al., 2016, p. 135). This has attracted opposition from

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Crotty and Paley who have argued that it mistakenly conflates the conducts and the possible
outcomes of directors. With those of the stakeholders and in the real sense is stock market
indications to invest ought to be extremely efficient.
Moreover, financilization in developing countries can lead to crises due to the significance
of external issues, even in nations with sound fundamentals. This concept has played a critical
part in endorsing financialisation. One portion in this theory that is possibly critical is the making
of the association between corporations and monetary markets in relative to agency challenge,
whereby the core challenge is to secure the group's managers to increase the returns for the
investors. This approach has got some reservations .Firstly, the organization approach promises
the way out of the group governance challenge as some of matching the manager's benefits with
those of the participants in the financial market. This approach has remained useful in justifying
the explosion in the maximum management reimbursement and stock option allowances, the
increase of the takeover movement and personal equity enterprises has also been rationalized by
that (French, 2016, p. 26). In addition, the agency champions for a legal observation in which the
only role of organizations-which are communal constructions-is to increase the shareholder
profits according to the law. That has restricted the strategy discussion focus to how to offer
shareholders more management over managers. In the course, extensive questions in relations to
the purpose organization and the attention of the shareholders have been retained completely
from the policy table.
Financialization can also lead to financial crises through contagion namely by shocks
that are conveyed across nations and states. The conventional economic principle has also
reached out to back financialisation by stating that broadening of commercial markets
strengthens commercial effectiveness. This foundation is extracted from Debreu and Arrow’s

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creation of financial resources as liable claims.in this view, widening the possibility of economic
markets and the commercial assets variety raises the rate of efficiency by expanding the range of
extensions by commercial instruments (Froud, et al., 2013, p. 135). This makes it able for
markets to smarter upcoming economic outputs, advances the ex-ante distribution of assets
amidst future possible economic traditions, which facilitates the assembling of the portfolios by
the agents that provide fair returns and risk coverage. Thereby, investors, borrowers and the
administration, if not effectively monitored, they can cripple the nation’s economy through
unpaid capitals.
Conclusion
Thereby, it would be correct to say that, financilization has both positively and
negatively affected poor and developing countries such as Ethiopia. In addition, Participants in
the greater market scheme can import external correlated information and price local market
identities with higher accuracy. The participants in the external market can also have the chance
to reliable financing than the local ones. In respect to the context, the following are the positive
impacts such as development of financial systems, enhancement and improvement of the
financial system, facilitating smooth and contentious flow of funds and capitals to developing
countries. However, for the negative impacts they include, financialization might lead to
financial volatility, it subjects the economy to market discipline, can also lead to crises especially
if there are imperfections in international financial markets, it can also lead to crises due to
significance of external issues and also the other negative impact is that it can generate and lead
to financial crises through contagion.

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