Do derivatives contribute to economic development? That is an interesting question but before even attempting to answer it, it is necessary to note that derivatives are but a part of the broader landscape of the financial sector. In economics, the ‘financial sector’ is often analysed separately from the ‘real sector’ where actual goods and services are produced. The distinction is important. As an oversimplified example, if an economy suffers 100 per cent inflation over a year because of excessive monetary expansion by the central bank, it will affect the financial sector significantly; but if incomes also grow at exactly the same rate and incomes are distributed in the same way as before, the end-result is that in real terms everyone is exactly as well off as in the previous year. (In this example the financial sector had no effect on the real sector.) A wider question, and perhaps more difficult to answer, is the question of whether finance and the financial sector of the economy contribute to development. This chapter looks at both questions without always separating them rigidly.

Chapters 11 and 12 discussed several examples where developing countries have benefited from the use of derivatives. Chilean companies had an exposure to the US dollar exchange rate because of their international investments. The forward market allowed them to hedge it. Mexico was able to avoid budgetary uncertainty by hedging its oil production through buying plain vanilla put options on crude oil. Uruguay was able to use weather index derivatives to protect against drought risk. On the other hand, there were also many examples where companies and countries hurt themselves by exposing themselves to derivatives products that they did not comprehend.

The question is, does one blame a tool for causing hurt or grief, or does one own up to one's failure to handle it safely? This debate is eternal and extends into many areas of public policy, as the American debates on gun control illustrate.