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9054 results in Finance and accountancy

Page 106 of 453

  • two - Problems with Finance

  • Vedat Akgiray, Boğaziçi Üniversitesi, Turkey
  • Book:
    Good Finance
    Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019, pp 15-100

  • Summary

    If an economy is characterized as a coin, then one side of the coin is the real sector (with all its tangible and intangible real assets) and the other side is the financial sector. If the fundamental function of financial markets is the translation of household savings into real business investments, then the aggregate value of financial claims must be equal to that of real assets. Given this ground-zero description, historical evolution of financial markets is best portrayed alongside the developments in the real economy. And this has much to do with intense global economic integration over the last 50 years.

    Size of the industry

    Historically, the first era of globalization, with its peak in mid-1800s, was largely in the form of powerful imperial countries trading with less developed regions rich in natural resources. This era came to an end during the First World War. The years between the two world wars of the past century was a period of high geopolitical uncertainty and hence very low international trade and investment. After the wounds of the Second World War were mended, however, economic globalization, with great help from technological advances, significantly improved people’s standard of living all over the world. Globalization has been criticized – often correctly – for many shortcomings and social challenges, such as deterioration in income distribution and domestic political instabilities. But the fact of the matter is that trade liberalization, which is both a by-product and also an enabler of economic globalization, has been materially beneficial for most countries and people. Figure 2.1 shows world’s total GDP and also GDP per capita since 1960.

    World GDP has increased from less than $1.5 trillion in 1960 to about $11 trillion in 1980. Since then, it has jumped up to $81 trillion in 2017. This is a remarkable added value of almost $70 trillion in less than 30 years. More importantly for economic wellbeing, GDP per capita has increased to $10,700 in 2017 from a dismal $450 per person in 1960, which is equivalent in purchasing power to only $1,280 in 2017. This could not have been possible without global economic integration and free trade.

  • three - Good Finance

  • Vedat Akgiray, Boğaziçi Üniversitesi, Turkey
  • Book:
    Good Finance
    Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019, pp 101-134

  • Summary

    Collateral damage of the global financial crisis has gone much farther than a mere financial event. It has worsened income inequality, especially in the developed countries, and eroded people’s trust in institutions and governments. This has given rise to an anomalous mix of populist and nationalist trends in societies and loss of faith in the merits of global policy cooperation and trade. Capitalism has come under scrutiny, both in open words and also in yet unspoken words, compromising the very ideal of free markets. This should not be allowed to take hold because free markets, despite all past abuses by bad people and firms, have produced tremendous gains in economic and social welfare since the 19th century. We cannot allow bad finance to hijack free markets. We cannot allow bad capitalism to drive out free markets.

    The world needs a new paradigm of finance. Using terminology from political economics, we need to formulate a new “social contract” between policy makers, financial markets and people. This contract should remind us about the role of finance in our lives and redefine the real purposes of financial regulation and economic policy. The guiding principle is simple: a financial system is good for the society when it serves the basic functions outlined in the first paragraph of Chapter One – and does nothing more. It is bad when it produces complex inner structures to hinder these functions and turns into a positivesum trade for itself by stealing from the main street. A bad businessman is bad but a bad financier is twice as bad.

    Brief politics of household debt

    This is not a book about the sociology or morality of debt in human societies. Several interesting new books deal with such issues to draw a different perspective to the 2008 financial crisis (Shiller, 2012; Plender, 2016; Bookstaber, 2017; Desai, 2017 and Tooze, 2018). However, in search for a solution to excessive debt, it may be useful to understand why people jump on credit whenever and however it is offered. Why do many people borrow more money than they can ever pay back? Why do banks and other creditors, with all their expertise in financial affairs, give out so much unpayable credit?

  • one - A Short Story of Finance

  • Vedat Akgiray, Boğaziçi Üniversitesi, Turkey
  • Book:
    Good Finance
    Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019, pp 1-14

  • Summary

    Money is in every facet of our lives and any activity involving money is possible only through the services of the financial industry with all its markets and institutions. Finance serves the purposes of:

    • 1. Payments system to match payers with payees;

    • 2. Market mechanisms to match savers with businesses;

    • 3. Financial planning for old age and wealth transfer between generations; and

    • 4. Managing monetary risks in business and personal lives.

    The basic function of finance is intermediation between people and businesses with surplus income and those who need capital for investment or consumption. Financial markets and institutions are expected to intermediate through efficient mechanisms with optimized transaction costs and proper governance. The more efficient a financial system is, the faster the turnover rate of capital will be for more production to better serve social and economic well-being. It is a platform of allocating capital to its best uses, both spatially and intertemporarily. A sketchy chart of the finance industry is given in Figure 1.1.

    This is an oversimplistic picture of the finance industry today and the actual ecosystem has become much more complex in recent decades. From the figure, there are two takeaways from the book:

    • • Without a finance industry, lenders (savers) cannot match with borrowers (businesses) that need money for investment in real productive assets, a costly impediment to economic growth. Therefore, the financial industry is probably one of the most vital infrastructures of societies, maybe second in importance after energy.

    • • Finance is a “contingent industry” in that, without a real economy producing goods and services, there cannot be any value to its existence. Without a link to the real economy, it can exist only as a casino of bets and games played by casino owners and gamblers.

    People save now to consume more later, or to have satisfactory income levels in old age. Similarly, people invest now to have a greater economic value later. The rate of profits from the real economy (where companies invest and produce) must therefore be greater than the total costs of capital and intermediation. Otherwise, businesses and borrowers would not use the available funds. People could not save through the system, or they would not lend except for charitable purposes.

  • four - Final Words

  • Vedat Akgiray, Boğaziçi Üniversitesi, Turkey
  • Book:
    Good Finance
    Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019, pp 135-136

  • Summary

    Finance is one of the most vital infrastructures of modern societies. Social and economic welfare depend on the quality of financial services. In free and democratic societies, scientific advances cannot be transformed into goods and services without properly allocated and utilized capital. Much like blood circulation in the human body, finance has to be invisible externally but smoothly flowing internally. Finance has to be the problem solver but not the problem maker. The pages of the Financial Times or Wall Street Journal should not be occupied by gloomy news every day.

    Unfortunately, the world today is nowhere close to this description of finance. Finance has turned into more of a trouble maker than a service industry. Financial intermediation has become an end in itself. There are fundamental problems in the financial system and flaws in our knowledge of finance. Starting with a major reform in financial education, we must reset our minds and act fast to cure finance. Or we may soon run the risk of an unpredictable disruption in the world order.

    Problem areas were explained and possible solutions were proposed. In one sentence, the financial industry has evolved into a self-serving complex system sustainable only through a continually increasing supply of credit. As such, it has become more harmful than useful for the society. Businessmen with entrepreneurial ambitions try hard to stay away from the finance industry as much as they can. The 2008 financial crisis left a populace distrustful of financial firms and public authorities.

    As explained with several examples in the book, the first step towards good finance is to break the growing vicious cycle of credit and debt. Short of this, regulation can never save the system, and it will always have to save the firms at the expense of the people. In a properly regulated industry, fates of firms are determined in free markets, not by governments. A functional approach to regulation is much needed.

    Like two parties who disagree cannot agree on what they disagree about, we cannot design a model of good finance without redefining the basic reasons why finance exists as a discipline and practice. We must show the courage to question the existing assumptions and set of tools of finance and economics. This book hopes to be a first step to this end.

  • Preface

  • Vedat Akgiray, Boğaziçi Üniversitesi, Turkey
  • Book:
    Good Finance
    Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019, pp vii-viii

  • Summary

    As an academician with a long scholarly record, and a businessman with many successes and failures, I have always believed that finance was the single most powerful locomotive of economic prosperity and social progress. The industry was already properly structured but it could be even better if only public authorities kept their hands off the profession. I loved mathematical finance and enjoyed teaching it to others – with unquestioned confidence in its benefits for society.

    This was all until the year 2008, when the greatest financial crisis of all times shocked the world and also when, as an irony of fate, I was appointed to chair the securities regulator of my country. Most of my tenure of office was in highly hectic meetings of international organizations, basically discussing what was wrong with finance. In time, most of my prior beliefs about the wisdom of finance started to fade away. I realized that the global financial system was fundamentally flawed and finance, in its current state, had become more harmful than useful for society. Today, I feel the agony of seeing that not much has changed ten years after the global crisis. And the call of duty was to write this short book to provoke wiser people to think about how we can fix finance.

    Many people deserve my sincere thanks for their help and support. Serhat Çevikel and Ceyhun Elgin of Boğaziçi University corrected many errors in earlier versions of the book. Serdar Çelik of the OECD and Tim Reid of Deutsche Bank provided valuable data. Paul Stevens, Caroline Astley-Brown and Ruth Wallace of Bristol University Press were graciously supportive through the whole process. Anonymous reviewers’ comments were much improving. I am thankful to the Turkish government for tasking me with regulating financial markets in the midst of a global crisis – a task which turned out to be the school of a lifetime. Last but not least, I thank my wife and daughters for their patience and support. They did not read a single page of the book but they loved the pink cover, maybe signalling that it is time to put some pink into colorless finance.

Good Finance
  • Why We Need a New Concept of Finance
  • Vedat Akgiray
  • Published by:
    Bristol University Press
    Published online:
    14 April 2023
    Print publication:
    05 June 2019
  • Presenting a sharp critique of extreme financialization and the economics profession's continuing blind faith in the efficient market hypothesis this book considers how our current concept of finance can be revised for the good of society.

  • Forecasting health expenses using a functional data model

  • Jens Piontkowski
  • Journal:
    Annals of Actuarial Science / Volume 14 / Issue 1 / March 2020
    Published online by Cambridge University Press:
    31 May 2019, pp. 72-82
    • Article
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  • Traditionally, actuaries make their predictions based on simple, robust methods. Stochastic models become increasingly popular because they can enrich the point estimates with error estimates or even provide the whole probability distribution. Here, we construct such a model for German inpatient health expenses per age using the functional data approach. This allows us to see in which age groups the expenses change the most and where predictions are most uncertain. Jumps in the derived model parameters indicate that 3 years might be outliers. In fact, they can be explained by changes in the reimbursement system and must be dealt with. As an application, we compute the probability distribution of the total health expenses in the upcoming years.

  • Conclusion: Impact of GST and What Might Happen

    • By R. Kavita Rao, Professor at the National Institute of Public Finance and Policy, New Delhi., Sacchidananda Mukherjee, Associate Professor at the National Institute of Public Finance and Policy, New Delhi.
  • R. Kavita Rao, Sacchidananda Mukherjee
  • Book:
    Evolution of Goods and Services Tax in India
    Published online:
    26 April 2019
    Print publication:
    23 May 2019, pp 182-196

  • Summary

    The goods and services tax (GST) has been presented as the major tax reform for the Indian economy. It is therefore of importance to examine the impact it has had on the economy, as well as on the citizens of the economy. There are three broad categories of evidence to look at:

  • The economy

  • Tax administration/compliance

  • Revenues of various governments

    • The impact on revenues of various governments has been examined at some length in Chapter 9. Hence this chapter will look into some of the remaining aspects and present some concluding observations.

    Impact of GST on Economic Growth and Inflation

    One of the long-term objectives of introducing GST is that it will reduce the extent of hidden and embedded taxes in the system and thereby create opportunities for investment in order to capitalise on the altered tax regime. The change to GST as a predominant indirect tax was expected to increase gross domestic product (GDP) and reduce inflation. International experience shows that GDP growth falls after introduction of GST but it recovers after two—three quarters and, conversely, inflation rises in the initial quarters before it declines (The Treasury, Australian Government 2003). While it is barely four quarters since the introduction of GST in India and hence the evidence of the reversal of the initial trends might not be visible yet, it would be interesting to identify the trends so far.

    Impact on Overall Growth

    Year-to-year growth rate of gross value added (GVA) at basic prices (2011–12 series, at constant prices) shows

    that growth rate was falling since Q4 of 2015–16 and it was 5.6 per cent at Q1 of 2017–18. The introduction of GST on 1 July 2017 lifts the growth rate of GVA as evident in Figure C.1. However, the average growth rate during 2017–18 (6.4 per cent) is lower than that achieved in 2015–16 (8.1 per cent) and 2016–17 (7.1 per cent). In drawing conclusions about the impact of GST on GVA from these numbers, it should be borne in mind that seven months prior to the introduction of GST, the economy received a shock in the form of withdrawal of high denomination notes.

  • 1 - Decades of Indirect Tax Reforms in India: A Journey towards Goods and Services Tax (GST)

  • from Part I - Genesis and Evolution of GST in India
    • By Sacchidananda Mukherjee, Associate Professor at the National Institute of Public Finance and Policy, New Delhi., R. Kavita Rao, Professor at the National Institute of Public Finance and Policy, New Delhi.
  • R. Kavita Rao, Sacchidananda Mukherjee
  • Book:
    Evolution of Goods and Services Tax in India
    Published online:
    26 April 2019
    Print publication:
    23 May 2019, pp 7-35

  • Summary

    Introduction

    The quest for a suitable indirect tax framework in India encompassing goods as well as services started a long time back. The constitutional assignment of powers for taxation in India included a number of stand-alone taxes on goods and services in addition to a few relatively more broad-based taxes, none of which were comprehensive in covering both goods and services. Further, this assignment divided the powers between the union and the state governments, thereby requiring a considerable degree of cooperation and coordination between the union and the state governments in order to initiate and establish a new indirect tax regime which addressed some of the concerns emanating from the old regime. Given the constitutional assignment of taxation power to different governments, fiscal autonomy enjoyed by the subnational governments, and complexities involved in bringing consensus among the subnational governments, the evolution of the Indian goods and services tax (GST) provides an interesting example of reforms in indirect taxes for scholars interested in public finance, especially in the case of federal countries.

    Reforms in indirect taxes initiated since 1986–87 helped in sequencing big tax reform such as GST in India. It helped to accommodate the political-economy dimensions as well as the acceptability aspects of the tax reform. What is significant about the Indian GST is that each and every aspect of design, structure and administration of the GST has evolved on the basis of political consensus between the union and provincial governments. For a federal country like India where subnational governments enjoy more or less a power structure similar to that of the union government and where there is considerable diversity among provincial (subnational) governments, building consensus for a destination-based dual GST system is a great achievement in the history of fiscal federalism. The role played by different institutions/committees in achieving the Indian GST requires special mention here. The present chapter is an attempt to provide readers an overview into the evolution of the concept of GST in India.

    India introduced GST from 1 July 2017. It is a comprehensive multistage value-added tax (VAT) on goods as well as services and it provides concurrent taxation powers to the centre (federal) and state (provincial) governments to collect tax on every stage of value addition.

  • 5 - Estimation of Revenue Neutral Rates for Goods and Services Tax in India

  • from Part II - Revenue Neutrality of GST
    • By R. Kavita Rao, Professor at the National Institute of Public Finance and Policy, New Delhi.
  • R. Kavita Rao, Sacchidananda Mukherjee
  • Book:
    Evolution of Goods and Services Tax in India
    Published online:
    26 April 2019
    Print publication:
    23 May 2019, pp 91-110

  • Summary

    Introduction

    The purpose of this report is to generate Revenue Neutral Rates (RNR) for the Goods and Services Tax (GST) for both the Centre and each individual state using information on the contours of GST that have been decided so far in the discussions of the Union government and the Empowered Committee of State Finance Ministers. For this exercise, it is important to summarise the key features of the design of GST (section titled ‘Key Features of GST Design’). Methodology adopted to estimate RNR is presented in the next section (‘Methodology’). The section titled ‘Results’ provides the combined RNR followed by rates computed for each individual government including the Central government. In undertaking this exercise, two alternative estimates of base of services have been used – one using PROWESS data obtained from CMIE (Centre for Monitoring Indian Economy) and the other using turnover data from the Ministry of Corporate Affairs (MCA) provided by the Ministry of Finance, Government of India (GOI). It should be noted that the entire turnover of firms supplying services would not constitute additional base for GST. There are two possible reasons why the base can be different from the total turnover – one, if these firms purchase taxable goods which are used for providing these services, then they can avail of input tax credit. In other words, the turnover of these purchases needs to be deducted from the turnover of supply of services. Second, since these services in turn can be used as inputs in the supply of presently taxable goods, they would already be a part of the base for taxation of goods at present. Hence, a correction on this count too would be required to identify the extent of turnover of supply of services for final consumption. The methodology used for deriving activity code wise turnover in each of these cases is discussed in the section titled ‘Methodology’.

    Key Features of GST Design

    The key features on which decisions seem to have emerged on the design of GST can be summarised as follows:

    1. Dual GST, a central GST and a state GST both levied on all goods and services.

  • a. It is proposed that there would be a list of exemptions and exclusions from the regime, but the exact items on the list are yet to be decided.

Page 106 of 453