Growth and Risk Trade-off essay

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The trade-off between growth and risk is obvious and the role of financial markets in this correlation should not be underestimated. Alexander Popov and Frank Smets (2011) give affirmative reply to this statement. Moreover, they claim that financial markets may even reinforce this trade-off. I think there is some truth in their claims.

In general, the main role played by financial markets is to transfer the capital from those people who issue it, to those who know how to apply it. Well-developed financial markets contribute to the economic growth in the country and have influence on the efficient distribution of the capital. The more developed financial sector is – the higher rate of growth will be. Furthermore, there is a suggestion that integrated financial markets improve productivity of the labor and stimulate launching of new businesses. However, high growth is interrelated with high risk. As a rule, big economic crises are preceded by quick growth of financial sector. Therefore, deep financial markets contribute to the economic development, as well as increase the risk of possible economic crises (Popov, Smets, 2011).

In the IMF’s report, it is also claimed that the economics of the country benefits substantially from large capital accumulated in the banks. Therefore, financial assets serve as a buffer which helps the economics to overcome the crisis. However, great accumulation of capital may prevent economics from the growth to some extent (Possible Trade-off between Growth, Safety in Financial Sector, 2012).  Laura Kodres, head of global stability analysis in the IMF’s Monetary and Capital Markets Department, added that excessively safe financial system influenced lending policy and diminished the sum of money available for credits. As a result, it creates an impediment to growth.

From my perspective, despite of the advantages which well-developed financial markets offer to reinforce economical growth, many of them cause high risk to the economics. Any changes in the financial markets lead to the “boom-and-bust” of the economics (Villanueva, 2012).  All in all, there are slim chances for avoiding risk in situations where large financial assets are involved.

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