Investment Banking and Private Banking - Coursework Example

College Economic development is the key driver of the global private banking and wealth management industry'. Discuss Economic development is a term that has been defined by many professionals in different ways to mean different things to different people. Many economic development professionals have defined economic development in terms that on a broad scale shows us that anything that a community or a government does to foster and enhance a health economy can fall under economic development. Economic development involves the improvement in the standards of living also referred to as economic wealth of a certain city, country or region to create a better habitat for its citizens. It involves the movement of the country's economy from a low-income economy to a modern day, high income economy, (Heyn, 1981). This development must bring about sustainable increase in living standards which implies that per capita income of the citizens will improve improved education and health as well as an environment that is friendly to human life. It's a concerted effort on the government to steer the direction of private sector of the country or in a city towards creating opportunities that lead to sustainable economic growth that can provide enough incomes to the labor force, enable employers to gainfully engage in business opportunities that eventually can provide enough tax revenue to maintain the country's infrastructure, this support a continued growth. It's therefore important that every country's governing body appreciate the impact of private sector investments in steering the economic development. Although there are several initiatives that enhance investments both domestic and foreign, there is no better alternative to private sector investment as an engine for development. The economic development process requires legal and institutional adjustments which enhance provision of incentives for innovation as well as investments so as to create an efficient production process and distribution system for the goods and services. (Sosale, S, 2000). It is important to know that economic development is different from community development. Community development is a process that is directed to making a community a better place for habitat as well as a better place to work. It's a structured intervention that focuses on giving the communities greater control over the factor that affect their lives thereby giving them confidence to tackle their problems as effectively as possible. Community development work hand in hand with the local groups and organizations that represent communities at local levels (World Bank, 2008, p.67). Community development may involve improvement of living standards f people in a certain part of a country or region but economic development involves improvement of well being of its people within the different layers of society such that everyone in the country or region has to potential and increased quality of life. Economic development is simply the creation of wealth in which the community benefits are enhanced. It involves deliberate intervention in the normal economic growth of a country to give positive results. From a public perspective, local economic development is a process that involves allocation of limited resources - land, labor, capital and entrepreneurship in a way that positively effect the countries business activities, Income distribution, employment and poverty reduction efforts. Looking at the various definitions of economic development by different scholars, no single definition captures all the different strands of development although there are common measurement tools like employment increase, improved economic output and increase in tax revenue (World Bank, 2006, p.89). Economic Growth & development though are largely interrelated; they are different in meaning as used in economics. Most economists use the term economic development to explain the various problems facing the underdeveloped countries and economic growth to in regard to developed countries. Economic Growth refer to increase in individuals per capita income or increase in the country's Gross National Product of a country or generally the sustainable increase in a country's production of goods and services which is also referred to as product per capita. Output of a country is generally measured in terms of Gross National Product. Development economics goes beyond the scope increased growth raising concern to the efficient allocation of economy's resources which are always scarce as compared to the needs of the country in developing countries. Its main concern is a sustainable economic growth over time which improves the standard of living for those living in poverty in developing countries. As such, one of the key goals of development economics is the formulation and implementation of public policies that are designed to enhance rapid economic growth (Mckinsey, 2006, p.120). Development of any economy is far more comprehensive and it implies continuous changes in the various socio-economic structures encompassing among other things three major areas, a key area in economic development is the set of policies that the governing body undertakes to meet the country's economic objectives which mainly include; inflation control, high employment and sustainable economic growth. It also involves the Policies and programs that enhance infrastructure improvement, increased literacy levels and medical access to the disadvantaged. Economic development also involves policies and programs directed at improving the business activities and improved technology. Development therefore involves the policies and processes that help a country to make an improvement in its political, economic and social welfare of its inhabitants. Economic development touches both social and technological progress and not merely an increase in production achieved in a country while economic growth only refers to an increase in output of a country quantitatively which at times does not result to development. Economic growth can be either intensive or extensive. Intensive economic growth is that growth achieved by using a certain amount of resources in a more efficient manner while extensive economic growth refers to that growth that is brought about by use of more resources i.e. land, labor and capital. Intensive growth requires development. It's not always that economic growth bring about economic development, developing countries have sometimes experienced high economic growth rates but with little or even no economic development and this is mostly common where these countries have acted as resource-providers to the developed or industrialized nations. However there is always an opposing argument that economic growth causes development, this is because some of the increase in per capita income is largely spent on human development, increasing literacy levels by individuals and improving health sector which are key tools of measurement of economic development (Ranis et al. 11). Some economists argue that there exist a two way relationship between economic growth of a state and its rate of human development. They argue by economic growth boosting increasing private incomes, it also leads to additional resources since increase in per capita income leads to improvement of sectors that enhance human development like health, education and other social amenities which in turn reduces poverty, (Anand 13). Human development and economic development are interrelated, economic growth benefits human development with increased income thereby increasing the families, government, no governmental organizations and individuals' expenditure. If the social services are distributed equally across the country unequal income distribution can be limited thus benefiting each individual and increasing living standards of the public which in itself if sustained brings about development. Most economists therefore argue that its inequality in distribution of income among individuals that brings the difference between growth and development of a states economy. Development since the Second World War has been known to involve economic growth i.e. the change in per capita income, and the attainment of a sustainable standard of living are inseparable especially in industrialized countries, (Mansell & When 7,8). Economic growth comes with an increase in a country's production of more goods and services or generally output. Economic development involves a change in the social-economic structure in a country. Economic development involves the fall in agricultural shares and rise in shares of trade banking, industries and services. Other things that are involved in development include a change in what the output from a country is composed of, change in the allocation of productive resources and eradication of poverty, unemployment and inequalities. For instance, in the past five years, the global private banking has been able to grow motivated by the exceptional wealth creation. During the period, wealth managers have had their focus on expansion. The links between the increasing competition and market competition which are more difficult have however set a mark in the beginning of an era that has more challenges. The changing environment has given rise to new opportunities to come up with a new brand for the well-differentiated global players. Some countries have increased their economic growth while in some countries where there is equal distribution of income private banking has driven both economic growth and economic development ( Weldon 1998). Other terms used in discussing economic development include modernization, westernization, and industrialization. Social scientists argue that economic development revolves around the theories that explain industrial-economic modernization, organizational and related aspects of enterprise growth in modern societies, (Mitchel 1999). In 1950's, it was easy to categorize countries into either poor or wealthy and different theories were developed to explain the disparity. These theories were namely; classical, neo-classical, and Marxist theories of economic development. The wealthy categories comprised of Western European countries namely; Canada and the United States where most people lived in great affluence and were consuming the largest percentage of world's resources. The other category included (and still include) countries from Latin America, Asia and Africa which were (and are still) poor, underdeveloped, and contained the largest percentage of the world's population, (Boris 2009). In an attempt to explain the disparity economists and public policymakers mainly from developing countries came up with different schools of thought which include; structuralism, linear-stages-growth model, neo-Marxist or dependency theory, and the neoclassical revival of the 1980s. These schools of thought mainly came into being to respond to the inability of classical, neo-classical, and Marxist economics to address the economic reality that plagued the poor countries of the world. There are different theories that discuss economic development. Some of the theories concerned with how economies develop over time include modernization theory, dependency theory, world systems theory, state theory, theory of uneven and combined development. Modernization Theory This theory compares and contrasts the developed and the underdeveloped economies to conclude that development can be achieved through embracing the processes that were used by those countries that are now developed, mainly western countries which include Canada and United States. Scholars established stages of development through which every economy develops while others conclude that development is a linear process which every developing economy should follow to attain development (Meir 1989). The theory further explains that education is key to modernizing a country's citizens and that if technology is improved to lesser developed countries it would increase their rate of economic growth. One key factor in Modernization Theory is that its scholars believe that for development to be realized in developing and underdeveloped countries, they must involve the developed countries by following their steps in attaining development. This theory actually insists that it's possible for developing and developed countries to achieve development at equal level with the developed countries. (Saksena 1970). Dependency theory Scholars if this theory were steered by the fact that economic growth in the developed countries did not as would be expected steer or lead to economic growth in the poorer countries. The assumption in this theory is that development and underdevelopment are related. The conclusions of the theory were that the world has both wealthy countries who dominate the poor countries and that the poor countries' work was to provide cheap minerals, cheap labor and agricultural commodities to the rich nations who are able to process and supply to the poor countries manufactured goods, technology hat is obsolescent in their countries. In such a relation, the poor continue being poor while the rich become more rich. The theory explains that the relations between these dominant and the poor states are dynamic since their interactions not only reinforce inequality but also intensify the unequal patterns and in also show that dependency is a continuous process, (Ranis et al. 11). The scholars of this theory held that for the developing poor countries must disengage fro this kind of relation with the developed nations and seek to enhance development through internal means. They encourage developing countries to embrace policies like import substitution so that they can stop buying manufactured products from the richer countries in order to encourage internal growth. However the policy of import substitution has proved hard to follow since most poor countries' internal markets are small in size and unable to support all their production, again the rich nations use large economies of scale to maintain their prices at low level and the poor countries are unable to embark on large economies of scale. The other thing that challenged this theory was the political will to transform their production and also the fact that poor countries lack control of their products especially at the point of selling. World systems theory This theory was adapted from the dependency theory in trial to cub the many criticisms that faced the dependency theory. It basically looks at industrialization in developing and less developed countries. A key feature in this theory is that there is no trust for the state and that state is seen as a collection of wealthy elites distinguishing feature of this theory is distrust for the state and a view in which the state is seen as a group of elites and that development can not be rated with industrialization. State theory State theory came up to challenge distrust in state that was there in world systems theory. It brings out the relationship between economy of a country and its politics describing the two as intertwined. There is no single country whose politics are the same in all perspective with another country and thus the theory brought out the uniqueness of a country's development as tagged to its politics. Politics of a country determines the country's stability which inturn determines things like investment both internal and external. The scholars of this theory believe that development of a country's economy is possible within the economy and do not necessarily have to be influence by other developed states if only a country can positive affect its social relations. Theory of Uneven and Combined Development This is a Marxist concept that explains the dynamics of human development over time and the possibility of development in economy and its civilization. It was initially used by scholars to analyze the economic development and civilization of the Russia where there was the most advance mode of technology and scientific developments which co-existed with a culture that was primitive and superstitious in nature. Later on they used the theory to describe the characteristic of the growth pattern in capitalist systems. They observed that countries economies develop independently from each and that the growth is almost always unequal in measure but agreed that these countries do not exist in isolation from each because the world society is interdependent. Models of economic development These are models that try to explain economic development over time. They include; Harrod-Domar model The model was developed in the 1930's, it suggests that savings provide funds for investment and that productivity of the investments which is per capita income steers economic development if well distributed across the economy, this draws an economic relationship between the growth rate of gross national product and the national savings ( Meir 1989). Exogenous growth model This model emphasizes on the role played by technological advancement in economic growth. It also referred to as neo classical growth model and establishes the relationship between savings and income but not the economic growth. Robert Solow the scholar of this model which is date back in 1957 argues that advance in technology was the key determinant for economic growth in the United States in the 19th century. This model has been challenge by several scholars who argue that economic growth can be maintained by use of more inputs rather than innovations, (Krugman, P. 73). The scholar however tend to conclude that economies with the same characteristics and technological change will experience the same level of growth which raise criticism as to the truth about that given that technology know how is actually linked to individuals and not the citizens at large. Having ignored factors like labor and its movement which enables flow and increase of the knowledge the model proved insufficient to explain economic growth, (Krugman, P. 73). Information-led development This is a development model that's has recently emerged and it refers to a strategy whereby a country focuses its resource to the information technology sector as an engine to improve its economic growth and thereby boosting its economic development by ensuring that this is equally distributed in all other sectors in both rural and urban regions. This strategy has worked in countries like India and Philippines. Given that development is mainly steered by information and technological know how, the strategy focuses on actionable information to provide solutions to challenges that face economic development (Chorafas, 2006, p.56). Dual sector Model This model is also referred to as Lewis model. It attempts to explain economic growth in developing states by the use of transitions in labor between the agricultural sector and the industrial sector also known as modern sector. It establishes a flow of labor from agriculture (which normally has surplus in labor in most developing countries) to industrial sector. The high rate of growth in industrial sector as compared with the traditional agricultural sector continues to absorb the excess supply of labor promoting industrialization which if sustained enhance economic development. Some of the factors that further stimulate the flow of labor from agricultural sector are that in agricultural sector, the wages, land for cultivation is limited in supply and the productivity are normally low while in the industrial or manufacturing sector wages for workers are high and also the marginal productivity is normally high thereby increasing the demand for workers at initial levels of growth. While agricultural sector uses labor intensive methods, manufacturing sector embark on capital intensive methods which promotes investment and enhances formation of capital. This model explains largely process of development for most developed states especially the United States, Canada and most of the countries in Australia. Some of the criticisms that this model face are that surplus labor can be generated by different factors like new technology which enhance intensification of work while movement of labor force from rural to urban may also be steered by the bargaining power and not necessarily the surplus in the sector. Another weakness of this model is that it assumes that capital information in the industrial sector is unlimited and perfect while there practically do not exist such situation (Anand 1989). Comparative Advantage This model focuses on the strategy of improving productivity of that which a country is better in seeking to dominate trade in the particular product or sector. This model is based on prediction that every country is capable of achieving gain if they specialize in what they are best in but this is not always the case. It's important to note that there are several theories that have been developed to explain economic development as discussed above and many more and the meaning of economic development has continued to be formulated by different scholars. This bring us to conclusion that the topic of economic development can not be exhausted because it's wide and terms are continually developed as new scholars continue to find ways of improving development of developing economies. Issue of private banking Private banking refers to banking, investment and similar financial services given to private individuals by banks in order to invest their assets. The word 'private' here is used to refer to the customer who is being given a service in a level that is more personal than in the case of retailing in a mass market. Thus, private banking does not refer to a private bank or a banking institution which has not been incorporated. In the past, the issue on private banking was seen as being very exclusive for serving the wealthy in the society where they were required to have a liquidity of over $2 million dollars but today, it is possible for private investors to open a private banking account with as little as $250,000. The private banking department will give services to an individual such as savings, inheritance planning, tax planning and wealth planning. One of the largest private banking divisions is at UBS AG, Merril Lynch and Citigroup. Such institutions gather more than 1trillion in assets in the management for clients (Ofusa- Amaah 2000). In the past five years, the global private banking has been able to grow motivated by the exceptional wealth creation. During the period, wealth managers have had their focus on expansion. The links between the increasing competition and market competition which are more difficult have however set a mark in the beginning of an era that has more challenges. The changing environment will give new opportunities to come up with a new brand for the well-differentiated global players. More and more people are becoming wealthier thus the wealth concentration is also increasing soaring private banking. In the past five years, the pool of investable assets increased by 11% each year to reach US$50 in the year 2007. The global growth is expected to reach US$75 by the year 2012. The speed of growth is expected to be more in the Middle East at 12%annualy but the US is likely to meet a slow growth of 8%. Offshore assets formed 16%, US$8 of the total global wealth. Switzerland, Europe and the Channel Islands are the major destinations of for non-resident assets and then Caribbean. The Asian centers of Hong Kong and Singapore have been having a fast growth but they are ranked third with reference to offshore assets. They are ahead of the US. When it comes to offshore flows, each region offers its own advantage and this is what drives offshore flows. The things that drive offshore flows include: demand for privacy and discretion, favorable tax and legal systems, financial stability and professional servicing. In the drive towards onshoring, regulators could hasten this trend by availing a business environment that is more wealth management friendly instead of enforcing penalties on global capital transactions. In the modern world, local regulation markets still has a lot of restrictions and this is a barrier to the wealth management services. Anyhow, the usual competitive advantage of offshore centers is constantly eroding more so to the more economically developed world. Accessing new markets through local operations or in other words onshoring, is a major agenda to many wealth management executives. At the same time, making a successful and profitable onshore play deals depends on many hard choices with regards, to the right time, appropriate model of a business and need for a local partner. In many markets, onshore management of wealth is restraint by shortage of talent, and national regulations. In order to be able to succeed in the wealth market, managers will have to take into consideration several things which include developing the appropriate private banking and attracting value proposition for the market (Chorafas 2006). Looking at the expected challenges and opportunities for the wealth industry for the year 2010, it is seen as a year which will have plenty of opportunities and many risks as well. This is because of the dramatic changes which are expected to occur in the wealth industry and the global economy. Some of these changes include; wealth is expected to migrate eastwards regulatory tightening, changing environment for offshore financial centers and continuous mergers and acquisitions due to the current financial crisis. The migration of wealth Eastwards, a changing environment for offshore financial centers, regulatory tightening, and continued mergers and acquisitions in the wake of the financial crisis will drive the wealth agenda for 2010. Wealth management can signal economic gyrations and thus it has not been immune in the current economic crisis. Between the years 2007 and 2008, the wealth of the world's rich decreased by 19.5 percent. The population of the world's rich was also affected and it fell by 14.9%. Looking at the stock markets, it can be seen that they have rallied sharply from March, 2009, thus we can say that the assets of the rich have also gained recovery at the same rate. The huge amount of money that was pumped into the economy in the past year is of major concern in the current year to the wealth managers. The expected response is that, this money will lead to higher inflation and thus result in high interest rates. The market will however be sensitive to the changes that will be brought by the actions of the central bank and the government. Looking at the Asian markets, they can be said to be emerging in that an infinite growth is expected there. It is expected that a portion of wealth equal to that from Europe and US will be found in Asia. Because of this expectation, wealth managers see this region as an important driver of future new business. Several firms are already expanding to Asia (Anand 1999). References Anand, JS (1999), Cooperative agricultural and rural development banks, Atlantic Publishers & Distributors. Annual Reports of Goldman Sachs, Merrill Lynch and Credit Suisse Asian Development Bank, (2000), Developing best practices for promoting private sector investment in infrastructure, Volume 1, Asian Development Bank. Boris, P (2009), Annual World Bank Conference on Development Economics 2008, Global: Private Sector and Development, World Bank Publications. 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