In the history of Europeans Union states, Ireland was considered one the poorest countries with relation to GDP. Given a time span of one decade after 1997, Ireland emerges to be one of the richest economies in terms of GDP. The financial structure and the economic development of Ireland can be associated with bank-based systems working with market-based systems and financial services. Among the highest bank, lending levels Ireland came second after Luxemburg in terms of GDP, with a whooping 176% in the year 2004. Considering the economic growth of Ireland, it is worthy mentioning that the period exiting between 1997 and 1999 had an impact on the growth rate. During this period, some counties belonging to the European Union experienced disintermediation. In the year 2000, the trend reversed, and a fall in stock markets was experienced. With these happenings, Ireland was observed to be one of the fastest growing economies that experienced the highest growth levels of deposits.
It was observed that bank-based financial systems were better placed where financial structure is of the essence. During the growth of Ireland’s economy, it was noted that there was a trend of increase in credit institutions. Their role in shaping the economy of Ireland was associated with the financial backbone they were giving into the developmental efforts. The increase of credit institutions points out benefit bank-based systems have over market-based systems. This is because the growth of Ireland was not targeting the limited EU market that existed during this period (1993 - 2005). However, it was striving to equate its economic development with the developments of countries like UK and Luxemburg. To do so, Ireland was targeting a steady GDP growth rate.
The GDP growth rate of Ireland is classified to be one of the highest with relation to a per capita of above 3%. The following are the GPD growth rates of Ireland in respect to per capita consecutively from the year 1995 to 2004: 9.9, 8.1, 11.1, 8.6, 11.3, 10.1, 6.2, 6.9, 3.7, and 4.9. Over the decade, average GDP growth rate of Ireland is 8.1 and 35 in terms of per capita. The per capita rate is one of the highest to have been recorded amongst the EU member countries. This growth is associated with the ability of Ireland’s credit institutions that played a prominent deal in financing the developmental efforts of her country. With most of the EU member states having a greater ration in terms of total loans to assets, Ireland maintains a low ration due to the presence of functional credit institutions whose mechanism applies the disintermediation trend. The other factor that makes this ration low in Ireland is because of sound importance of growing financial markets (Goldsmith, 1969: 72).
There is the factor of stock market which happened to be one of the pillars of economic growth of Ireland. Ireland does not have an unusually large stock market but has a large capitalization with lowest market liquidity. The factor of stock markets takes to account the market liquidity and capitalization. In an event where the market is small, if capitalization is considerably large, then there is an aspect of strength in the stock market.
The banking industry in developing countries and some of the developed countries provides a foundation for comparison between management by investment and pension funds in respect to favorable tax treatment. Pension funds and growth of investment are encouraged by Insurance companies and credit institutions for the case of Ireland. This is because asset management makes a significant share with their income that is not based on interest. The above situation still leaves room for development in terms of GDP growth. Besides the embrace of these movers by Ireland, the rest of the EU member states fair unfavorably compared to US. With the inclusion of Ireland’s high GDP growth rate, the overall percentage in GDP growth of all EU member states comes up from the estimated 29% to almost 33%.
The saturation of markets has been one of the facts inconveniencing growth of non-life business. The whole situation can be associated with the deregulation of the EU insurance market which caused lack of demand and a fall on premium rates. The situation triggered unfavorable competition among the EU member states. The higher the insurance spending on non-life business the better the chances a country has at maintaining the GDP growth rate. Ireland and a few other members of the EU were some of the highest spenders in the non-life insurance. This was the backbone that stabilized their survival during the competition and ensured a strong financial strength (Goldsmith, 1969: 98).
When it comes to the high economic growth rate of Ireland, the reason behind this was the waved corporate taxes. This situation was believed to have been one of the factors that encouraged investment in Ireland. From the past few decades, Ireland’s slow growth rate was associated to many factors, and the impact was enormous in terms of recognition. Recognition of Ireland by a vast margin of the market spectra would have helped to develop a strong market foundation. So with recognition as one of the aims and goals of development, Ireland succeeded in this by waving corporate taxes. With investors from all over the country and across Europe Ireland was at the best opportunity of drawing the attention of a large market. It is said that the bigger the economic rate of growth the better the chances of attracting more markets. Growth in market size translates to the high rate of GDP growth rate relative to local and foreign investment (Goldsmith, 1969: 107).
The bank-based system can be taken as both theoretical and practical. For the developed countries, its use is minimal and its practice is limited to limited issues. With this in mind, we cross over to the side of the developing states. In developing economies, the bank-based system is applicable and can be practiced effectively to bring out the expected results. In terms of comparing financial structure and economic growth or development, bank-based systems provide the foundation of identifying the issues to be addressed and estimating the level of urgency. Bank-based systems are considered to be more effective when it comes to addressing short-term issues than market based systems. With application in growing economies, it is used to address the short comings of the market-based system. In relation to Ireland, financial structure influenced economic growth considerably (Kunt, 2004).
Taking the bank-based system theoretically, it argues that banks can finance development better that market in developing countries. Strategic allocation of savings can be resulted to by state-owned banks in the event where markets are failing. This is the situation that explains shortcomings of market-based systems and the importance that bank-based systems play. Banks that are not hampered by regulatory restrictions have the upper hand in gathering information and obtaining more details on economies of scale. This mechanism worked for Ireland in that it utilized banks as credit institutions in addressing matters of urgency. The matter of urgency in the Ireland case was getting to an economical elevation that would have enabled her to compete favorably with the rest of EU member (Goldsmith, 1969: 118)
With respect to financial structure and development, bank-based systems do not contribute to shaping the financial structure instead they act as bail out plans in case the structure tends to be failing. On the aspect of development, a ratio of loans to assets should be kept low. In a case that depicts a different situation, development lags behind. This is because the assets are traded to cover the loans; in this situation, there could be infrastructure development but the percentage of debt drags the developmental mechanisms. Ireland was able to keep this situation favorable; this resulted to a favorable business climate where development was not entirely based on the financial structure.
As a theory, it explains that economic growth and development is better achieved if markets are used the movers of economy. This is not true if the argument by bank-based systems is applied. It states that information and details on economies of scale are studied and classified for only specific issues. The market-based systems assume that information should be asymmetrical in nature. Going by this assumption, it is clear that any pertinent information that would be emanating from the system would be accessible to all players in the business arena. Relating this to the situation or Ireland, the bank-based systems were erected to address the short-term issue of gaining financial and economic stability. On the other hand, market-based systems are applied to push the economy by encouraging investors to do so with a clear and leveled understanding of the market (Davis, et. al., 2004: 60).
Market-based systems are brought in to bail out situations which the banks may have been unable to address. This is because banks are only sought to address issues of urgency. Economic growth is not a task that is to be realized in one decade or two. Development of a state relies heavily on trade and how effectively it competes with other players. Applying the market-based system to Ireland as the initial strategy would have cost its development considerably. Recognition as earlier discussed is not owed to historical events or geographical location but rather by financial power, the ability to produce goods and services that can compete effectively with the goods and services of the rivals. Once recognition is realized, stability is achieved by consistency with aggressive trading. This aggression points out the path towards a strong financial structure which in return affects the GDP of the country. At this point, the ratio of financial development to economic development grows to a point close to 1 is to 1 with financial structure lagging behind by an extraordinarily minimal margin. Financial development lags behind because its strength depends on the rate of economic growth which owes it progress to business activities.
Bank-based systems and market-based systems do not compete with another. However, as much as their applications may be different; they work hand in hand. The purpose and the theory of financial services merge the points to be addressed by bank-based and market-based. With the above point taken into consideration, the purposes of the financial services give an impression that means do not matter but the issues being addressed. The function of the financial services is to create not to regulate, a better functioning banks and markets. It can be simply put by saying that banks and markets do not matter but what matters are both (Dewing, 1922).
Ireland having had an unusually poor GDP growth rate turned around and emerged as one of the highest GDP grossing states in the world a decade later. How did financial services contribute to this? The significance of the financial services in shaping the growth rate of Ireland was shown in that fact that those bank-based systems were made to work with market-based systems. The result of the collaboration gave birth to the growth rate and opened the channels of trade that triggered development in the long-run. Taking financial services as the collaboration between bank-based and market-based systems, the relation of financial structure and development can be associated with a situation where the result of their ratio is 1 (one). This is because without a functional financial structure, there could never be a notable economic development. To this point, with other factors like recession kept constant, it is notable that financial services link the differences between the theoretical bank-based and market-based systems together thus resulting to a practical approach that equates financial structure and economic development (Dimitri, 1991: 91).
Effect of Bank-Based Systems on Financial Structure and Development
Bank based-systems play a role of bail out where market-based systems cannot. This means taking the nature of market-based systems of long-termism bank-based systems only come in to address short-term issues. Statistics show that the average GDP growth rate of Ireland was 8.1 percent between the year 1995 and 2004. If bank-based systems where applied to result to this change, then they must have been applied immediately before the changes started taking shape. The same way, the stable GDP growth, can be associated with circulation of financial strength by reinvesting. However, we would not say that since this growth rate started to go up there were no situations that would have needed the replication of the bank-based systems. At this stage, it is clear that the inconsistency of growth rates as shown in the introductory part of this paper can be associated with alternating favorable and unfavorable business climates. With declining GDP growth rate, bank-based systems were the only option the situation would have been rectified with (Davis, et. al., 2004: 58).
The effect brought by bank-based systems on financial structure and development is the issue of balance and of maintaining consistency. Given the GDP growth rate fluctuations in the Ireland case, it can be pointed out that the financial structure tended to influence development negatively if the returns from developmental projects like trade and investment were not paying off properly. The moment financial structure fell short of options to save the economic development projects, and then what was expected from the projects declined and if the situation was left unattended, then there would be a regular fluctuation. This is the point where bank-based systems would come in to rescue the situation by lending. The ratio between loans and assets used in the trade was supposed to be observed with keen interest. It is because of debts that a potential player exits the main field; a factor that Ireland considered carefully in her strategic development plan. At this point, we can clearly say that it is the effect of bank-based systems it to limit the heights of the ratio of financial structure to economic development (Dimitri, 1991: 120).
Effect of Market-Based Systems on Financial Structure and Development
Financial structure can be defined as the financial strength that a state has in relation to investing and responding to matters of national concern. The web made by different channels that work together contains the elements that make up the financial systems to work. With many systems, it comes to be a structure upon which the fate of economic development lies on it before returns. The returns from economic development projects fund the structure hence returning it to the initial or even a better state. The effect of the market-based systems comes in the form of laying a foundation of consistency and reliability within economy developing projects.
By giving companies and investors information that they can use to invest properly and promoting fair competition, the effect of the market-based systems on financial structure and economy development hibernated from the smallest element of the bigger picture. The picture being the development of the economy while the element is the entity that runs projects aimed developing the economy. In terms of the role played by the market-based systems to ensure that the entities and the elements, which make up, the mechanism of development are a considerably motivated. A similar stage like the one on the bank-based systems is reached where a ground to balance the financial structure and economic development has to be reached. The role played is to ensure that the returns from all forms of economy developing projects provide a considerable amount that can sustain the financial structure.
Effect of Financial services on Financial Structure and development
Bank-based systems’ effect on the financial structure and economy development is to make sure or provide a means that balances the relationship between the two. It is clear that a failure in monitoring one of the two (financial structure and economy development) is harmful to the other because it breaks a certain chain of relation. On the other hand, market-based systems provide a number of opportunities aimed at developing the economy in the long run. Given that market-based systems only provide a mechanism aimed at sustaining the elements and entities responsible economic growth, the need to merge it with bank-based systems arises.
Financial services act as links between bank-based and market-based systems. The desired effect that is brought by this merging is in the form of absolute balancing of terms of trade and the channels of doing trade. The terms of trade involve risks; a plan is always supposed to be in place in case the risks are encountered; that is where the bank-based systems come in. Channels of doing trade are the people, the companies, and the nature of the market; by regulation these, the number of risks that bank-based systems is supposed to cover are eliminated. This effect is reflected in the loan to asset ratio. The ratio goes down and hence promotes a level of equity between the financial structure and economic development. (Dewing, 1922: 88)
The Ratio of Financial Development to that of Economic Development
Assessing a number of methods used to ensure balance between financial and economic development, the ratio of one to the other varies with consideration to the elements and entities that make each up. By employing bank-based systems, the ratio shifts in favor of economic development. This is because the banks step in to help, somewhere a gap is left. This gap is only payable by sacrificing the returns that come from developmental projects. A point like this one is for the borrower needs to be careful in order to equate debt and assets to his/her advantage. Going back to the effect of the bank-based systems on the ratio of financial development to economic development, it is clear that when economy development is being rescued financial development is taken aback by the creation of a debt (Susan, 2010).
Financial development and economic development are connected in that each tends to define the fate of the other. When financial structures are stable they tend to make the means and channels of economic development better. By better, it is meant that the financial structure happens to be the initial economy development backbone. Thereafter the returns from the economic developments projects serve the systems making up the financial structure with funds to hold the financial strength of the country at hand. Ireland having being one of the fastest growing economies with consideration to GDP growth rate is an example where the ratio of financial and economic development of essence.
The secret behind the high GDP growth rate from the year 1995 to the year 2004 is associated with the well structured financial services. Financial services are not actual services but theoretical reference or the combination of bank-based systems and market-based systems. Despite the high-growth, rate in relation to GDP, fluctuations in the growth rate have been noted through out the 10 years observatory span. It is believed that bank-based systems were responsible for reinstating the situation every time it was going falling. The purpose of bank-based systems was to provide short-term urgent solutions.
Bank-based systems acted like rescue plans; so what mechanism was running the economy? Initially in this paper we discussed that the aim of Ireland was not to secure market outside its boundaries, it was to make its presence known. After gaining the attention of the markets without serving them in the first place, Ireland embarked to securing the market. The market-based systems were aimed at providing symmetrical information that brought balance between investors. This combined with the cut on corporate tax drew the attention of many investors. This was the point where economic development was funding itself by holding the systems that made up the financial structures stable. In return, the significance of the financial structure was to promote reinvesting and fund more projects that would develop the economy. At this point, the ratio of financial development to economic development was 1:1.