Economy

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Karim M I, Kouchakzadeh S, Asna Ashari H, Karim M. The Impact of Financial Suppression upon Iranian Rural Poverty . serd 2015; 4 (11) :75-86
URL: http://serd.khu.ac.ir/article-1-2239-en.html

Globalization, new pattern of global economy growth, weakness of welfare state along with cultural and thinking processes such as criticism regarding political economic system challenge prevailing economic development pattern, eradication of poverty and social welfare. This challenge resulted in proposing of rural social approach with emphasize on community based development plan. Low rate of physical investment in rural areas regarding growth domestic products, the existence of in appropriate economic, social and physical infrastructure in the area of transportation, communication, irrigation, education and medical care and hygiene are among some signs of under development. However, target free plans with respect to eradication of poverty, and lack of cause and effect approach could be considered as development barriers. It is argued that empowerment of the rural settlers and increase in their economic and social capabilities are prerequisite for any rural investigation. The development of financial sector could play prominent role regarding the achievement of accelerated and continuous economic growth. Countries which possess well developed system could better be able to pace along development course. Most countries economy during 1950s and 60s were affected by those economists who were in favor of financial suppression. Regulations are the major specification of financial suppression. This could deviate the prices in financial markets. These regulations include the top determination of upper limit of nominal interest rate regarding deposits as well as theone pertaining to mortgage rate, high legal bank financial reservoir and the allocation of command credits. These limitation and barriers make the financial flow low. Furthermore, financial resources are devoted to low efficient and non-prioritized plans. Thus financial suppression will lead to downsizing of fiscal sector and as a result decrease in economic growth.

Financial suppression as an important challenge demands some efforts with respect to the assessment of financial mediation in economic activities. Financial suppression was measured by different indices. Rubin & Martin (1992), Hang & Vang (2001), Coli (2001), measure the level of financial suppression by real interest rate and inflation rate, rate between government debt and cash flow, and the management of exchange rate respectively. This study aims to measure the impact of financial suppression over rural poverty by adding couple variable beside those offered by forgoing studies using 2SLS where Lpo Stands for logarithm of level of rural settlers poverty  are the indices for financial suppression which are associated with real interest rate, exchange rate gap (official and free market rate), the difference between domestic inflation rate as opposed to global rate, the ratio of government debt over cash flow ,existed capital in rural areas, the logarithm of rural unemployment rate and the logarithm of rural income respectively. This equation is capable of investigating the ration ship between exogenous and internal variables between 1370-91.

This study suggests that there exist a negative relationship between the financial suppression variables and poverty level. This could be justified by the existence of poor capital market and the degree of dependency of production firms on credits. Furthermore, lack of an appropriate investment mechanism increase the bank debt of small rural investors. Moreover, credit conditions are vulnerable. This study suggests that one percent increase in poverty level is associated with 0.11 decreases in rural investment. There exist a positive relationship between income and capital. Increase in production level means more income and this in turn cause increase in capital and level of investment. The existence of positive and important relationship between financial suppression and rural poverty, well justify development of plan for departing from suppression. It is argued that lack of financial suppression and financial development could pave the way for financial mediators to invest in rural areas. Doing so could create job opportunities and eradicate rural poverty. This study further suggests freeing the financial market in order to combat this kind of suppression.