Posted by Ignacio on
Fri, 29/09/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
Although there exists a near-consensus among economists that trade liberalization strongly promotes growth and reduces poverty, concern about its ill effects has not abated among policymakers and the general public. Against this backdrop, in upcoming weeks we will review the links between openness, growth, and poverty reduction after first presenting the rationale for trade.
The Rationale for Trade
Trade is motivated by the expectation of economic gain. Indeed the theory of absolute advantage states that nations gain by producing goods that require fewer domestic resources and exchanging their surplus for goods produced abroad with fewer resources. Each country can benefit from specialized production, which encourages trade. The theory of absolute advantage is incomplete, however, because it ignores the gains available through trade even when one party has an absolute advantage in the production of all goods. Those gains are explained by the theory of comparative advantage. The theory of comparative advantage holds that mutually beneficial trade is always possible between nations whose pre-trade relative costs and prices differ. According to the theory, international trade is the result of the exploration of benefits to two countries arising from trade. When trading countries concentrate on producing goods and services in which they have a comparative advantage, they benefit, and world output of goods and services is maximized. Differences in endowments of natural resources, human resources, and capital give rise to comparative advantage.
- The theory of comparative advantage assumes free trade across countries. It assumes access by participating countries to markets of member countries.
- The theory assumes fair trade among countries.
- Policies can be trade-creating, such as outward-oriented policies, which encourage production for export.
- Policies can also be trade diverting. Trade diversion occurs when policies are inward oriented and do not encourage production for export.
By engaging in trade, most countries expect to increase incomes for their producers and reduce costs of goods for their citizens. The global value of income and output is maximized if the opportunity costs of producing everything in every country are minimized. Trade, therefore, makes various contributions to different sectors of the economy.
- Trade is a source of revenue for government from licenses and trade taxes.
- Through exports, trade also is a source of foreign exchange.
- Imports and exports are exchanges of goods and services, which can encourage better relationships between countries. Countries that trade with each other are more likely to seek a peaceful solution to conflicts in order to avoid disrupting trade.
- Whole communities are dependent on trade for a livelihood. From producers to retailers, to importers and exporters, trade is often the only source of revenue that enables people to make a living. Efficient trading patterns permit people everywhere to enjoy higher living standards.
A number of factors ensure positive gains from trade at the international level.
Specialization. Specialization gains arise from producing and selling goods in which a country enjoys a comparative advantage and buying other goods from countries that can produce them at a lower cost. Access to export markets widens the scope for specialization gains, while simultaneously giving producers access to goods at lower opportunity costs than if they had to rely solely on domestic production.
Uniqueness. In some regions, local sources of certain goods do not exist. Technology gaps, for example, may affect a country’s capacity to produce a good or exploit a resource. Uniqueness gains arise from trading for goods that are not locally available.
Scale. Specialization gains may be limited by market size. Moving into the international market permits expanded production. Gains from scale occur when access to export markets stimulates production of larger amounts of goods at lower average costs.
Dynamic. Dynamic gains occur when trade accelerates economic growth and development. by spreading technology, accelerating capital formation, or encouraging innovation in the anticipation of succeeding in lucrative export markets.
Political stability. Political gains from trade arise when economic interdependency facilitates international political stability. Mutually beneficial trade is a powerful incentive for countries to avoid conflict by engaging in peaceful negotiations. The interdependency created by trade reduces the likelihood of war.
Next week: Trade Barriers
Posted by Ignacio on
Thu, 28/09/2006
This is the title of a new report recently published by the World Bank's South Asia Region department.
Recent economic growth has led to impressive poverty reduction in South Asia during the past decade. Currently, growth is creating not just more resources but the potential to generate the political space for greater reform. On the one hand, it is breeding greater public demand for addressing urgent challenges; on the other, it gives politicians the opportunity to make tradeoffs through strategic prioritization. The report also argues that growth, and the need for even faster growth, is helping bring South Asia’s key problems to the fore, creating pressures to deal with them. This means South Asia faces an unprecedented opportunity: a chance of ending poverty in a generation.
Tha South Asia Region at the bank has also recently launched two websites dealing with poverty and growth in the region. A lot of useful information at the tip of your fingers:
Poverty in South Asia
Growth in South Asia
Related: South Asia: can poverty be eliminated?
Posted by Ignacio on
Tue, 26/09/2006
Joseph Stiglitz presented today his new book “Making Globalization Work” in a packed auditorium at the World Bank.
Mr. Stiglitz rebuffs the image of globalization as the rising tide that lifts all boats at the same time. Globalization can be a riptide that destroys all non-prepared boats. Another classic metaphor he dismisses in his book is Adam Smith’s invisible hand: “… the reason that the invisible hand seems invisible is that it is not there.”
Mr. Stiglitz writes: “I believe that globalization has the potential to bring enormous benefits to those in both the developing and the developed world. But the evidence is overwhelming that it has failed to live up to this potential”. In his presentation he acknowledged success stories such as China and India, but argued that failures are more prevalent: Less growth in Latin America, NAFTA as a failure for the poor, more crises worldwide, money flowing from poor to rich countries and poor countries with more debt that they can manage.
One of the biggest problems, according to Mr. Stiglitz, is that economic globalization has outpaced political globalization, with the economic consequences of globalization having outpaced our ability to understand and shape globalization and to cope with these consequences through political processes. To make globalization work we have to acknowledge that there are losers, and we have to decide how we are going to deal with that.
In his book, much like in an anti-globalization protest where the “abolish the WTO” banner marches together with “save the turtles” and “ban Microsoft”, there is room for many different topics including trade, environment, patents, etc. I haven’t finished reading it, but so far it makes a good read, at the least providing food for thought.
Related: For a more positive view on globalization, read Ernesto Zedillo’s article in Forbes Magazine, Give Globalization a Hand.
Posted by Ignacio on
Mon, 25/09/2006
Give Globalization a Hand, asks Ernesto Zedillo in Forbes Magazine. The former President of Mexico says globalization works but it is not inexhaustible.
Here's a fact worth reiterating: despite the severe shocks and imbalances that have hit it off and on during the early years of this century, the world economy continues to grow, with low inflation. Of course, performance varies across countries and continents, but there are two generalizations you can make: The already rich countries keep enjoying expanding economies, and in the rest of the world millions of people overcome poverty every year, thanks to economic growth. Is there a force underlying this benign evolution that transcends national borders? Yes. That force is international economic integration--or globalization, if you wish.
...
Globalization has, in short, been an incredible force for good in the world. But is this force inexhaustible? Unfortunately, no. Modern globalization has so far proved stronger than the forces and events arrayed against it, but there's no guarantee this will always be the case.
Joseph Nye writes in India Today about India’s growth and increasing soft power, praising its democratic system which gives the country an advantage over China. (via Factiva)
This is where India has an advantage. China has grown more rapidly and done more to reduce poverty over the past two decades, but it has not yet come to terms with the problem of increased political participation. India was fortunate to be born with a democratic constitution and political structure. This means it has passed a test that China still faces, and that makes India a source of attraction. Of course, India still faces challenges of poverty with 260 million people surviving on less than one dollar a day, inequality tied to a caste system, and corruption and inefficiency in the provision of public services. But India is also changing and adapting within a broad democratic set-up, and many foreigners find that attractive. Despite its problems, it is a safe bet that India's hard and soft powers are likely to rise in the coming times. If India can combine the two successfully, it will be a "smart power".
Paul Wolfowitz and Rodrigo de Rato on getting back to business on Doha (via Pienso)
Vietnam is dubbed new “Asian tiger” in a report on Vietnam's future economic development, released by Hong Kong and Shanghai Banking Corporation (HSBC). In the report, entitled "Vietnam: Going for the next level", the bank assesses that Vietnam's growth over the past decade has been impressive, averaging 7.2 per cent annually, while the share of the population below the poverty level (US$1 per day) has fallen from 51 per cent in 1990 to 8 per cent. (Thai News Service, Sept 25/ Factiva)
Senior officials from the ASEAN + 3 countries are meeting in Beijing this week to discuss regional poverty reduction policies. Director General of ADB's East Asia Department, H. Satish Rao reviewed tremendous progress in poverty reduction efforts in Asia, but noted that "the job is far from completed." (ACN Newswire, Sep 25 / Factiva)
"Income poverty reduction has been impressive but performance on the non-income poverty front still requires improvement," Mr. Rao said. "Areas of concern include primary education, child and infant mortality, maternal mortality, prevalence of tuberculosis and HIV-AIDS, and severe environmental problems." Mr. Rao's remarks, read on behalf of ADB Vice-President C. Lawrence Greenwood Jr., pointed to key lessons learned from regional experience. Among these is the need to sustain and broaden growth, which has been a critical engine for past poverty reduction in ASEAN+3 countries and the Asia and Pacific region as a whole. Growth processes must also be inclusive and participatory, ensuring progress in areas such as social development and environmental protection. Mr. Rao stressed that "there is no one-size-fits-all solution to poverty," noting that country-specific approaches are needed to address key local constraints.
Posted by Ignacio on
Fri, 22/09/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
Emigrant remittances have come to represent an increasingly important source of financial flows between developed and developing countries in recent decades (Exhibit below and Spatafora, 2005, who shows that remittances – all unrequited transfers from migrant workers to family and friends in their country of origin – have grown steadily and are expected to reach $160 billion in 2005). Improvements in technology in the banking industry that reduce the costs and increase the geographical range over which remittances can be sent should see more unofficial remittances become recorded. Chami et al. (2005) hypothesize that this may be a contributing factor to the increase in recorded remittances in recent years.
Worker Remittances (in millions of US dollars, 1970-98)
Source: World Bank reproduced in Chiami, R. et al (2005)
Nevertheless, a significant proportion – estimated from anything between 35 and 70 percent of official remittances – remain unrecorded. Unrecorded remittances are channeled through the informal sector and are not captured in official balance of payment statistics. (While remittances outside the formal sector may be used for legitimate reasons, they may also be channeled to unproductive activities such as money laundering, drug money flows and financing terrorism). Examples of both formal and informal channels include (i) interbank transfers; (ii) formal nonbank money transfer operators; (iii) post office transfers; (iv) cash and commodities carriers; and (v) informal money transfer operators (Kireyev, 2006). Other channels are more country and/or region specific – Fei-Ch’ien (China), Padala (Philippines), Hundi (India), Hui Kuan (Hong Kong) and Phei Kwan (Thailand). The hawala system, historically associated with South Asia and the Middle East, refers to an informal channel for transferring funds from one location to another through service providers – known as hawaladars – regardless of the nature of the transaction and the countries involved. (EL-Qorchi, 2002).
While some studies suggest a self-interest motive for remittance arrangements, the motivation for remittances is seen as primarily altruistic (Stark and Lucas, 1988 and Chami et al., 2005) and mainly confined to transfers between family members. The concentration on the household has formed the basis of the studies of the microeconomic impact of emigrant remittances. Studies have focused on the pattern and motivation of remittances and have shown a positive impact for the household in terms of increased consumption, (property) investment, and better education and health care (Kireyev, 2006). Thus, from a microeconomic perspective, remittances should have a positive impact on growth.
The literature, most of which is fairly recent, is, however, not very definitive on the macroeconomic impact of remittances. For example, Chami, Fullenkamp and Jahhah (2003) suggest that remittances have a negative impact on economic growth whilst Aggarwal and Spatafora (2005) find no effect and Giuliano and Ruiz-Arranz (2006) show that remittances promote growth in countries with shallow financial systems but have no impact in countries with well-developed financial systems. The lack of a concrete discernible relationship is unsurprising. First, the impact on growth will depend on whether the remittances are spent on consumption or investment. To this end, the research suggests that remittances have primarily been used for consumption purposes with little impact on long-run growth. Second, the research shows that remittance inflows are countercyclical, increasing during periods of weak economic growth in the receiving countries. This countercyclical nature makes it difficult to establish the true impact of remittances on economic growth. The counter cyclical nature does however suggest that remittances can play a large part in maintaining macroeconomic stability and mitigating the impact of adverse shocks. A number of papers have attested to this (quoted in Spatafora, 2005).
The distributive effect of remittances has occupied a large part of the evolving literature. Remittances have not only been shown to mitigate the impact of adverse shocks to an economy, but they also have been linked with helping to reduce poverty (Aggarwal and Spatafora (2005). Kireyev (2006) suggests that the decline in the poverty rate in Tajikistan from 81 to 60 percent over 2000 to 2003 was helped by the significant level of remittances to that country (flows of remittances have reached 50 percent of GDP). Moreover, children in households receiving remittances are more likely to receive better education and healthcare.
Distributive effects can also be negative. Kireyev (2006) outlines a number of negative effects of remittances for Tajikistan that also feature in studies for other countries. Remittance inflows can/may:
- impede monetary management and rekindle inflationary pressures – the unpredictability and seasonal nature of foreign currency inflows create uncertainties for monetary management;
- lead to an appreciation of the national currency, which may hamper competitiveness;
- contribute to the expansion of the trade deficit – in Tajikistan most of the remittances are used to finance imports;
- create a strong disincentive for domestic savings – declining savings can potentially deplete the resource base for investment and can even turn negative; and
- represent a serious moral hazard problem by reducing the pressure for reforms. Remittances enable households and private businesses to support their own consumption/investment independent of the national government, thus reducing the pressure for the authorities to create a better business environment and deal with the problems that forced the people to leave the country in the first place.
Furthermore, while migrants may learn skills that might be useful to their country of origin if they return, offsetting this is the ‘brain-drain’ and the loss of human capital hampering the country’s development prospects. Mishra (2006) shows, for example, that the Caribbean countries – these have lost in excess of 70 percent of their labor force with more than 12 years of completed schooling – are not compensated for “brain-drain” impacts by the significant inflow of remittances.
While some of the research has focused on the policies and regulations that determine the flow of remittances, further research is needed on how to create a sustainable development path for the source country. In summary, remittances represent a short-term fix to what are long-term problems should they continue to be unaddressed.
Next week we will start looking at Trade Policy and the Poor
Posted by Ignacio on
Thu, 21/09/2006
A "handy guide to the leading Asia-Pacific think tanks working on development and economics", from our colleagues at the Asian Development Bank Institute.
Via Truck and Barter.
Posted by Ignacio on
Tue, 19/09/2006
This three-week on-line course is organized by the trade department at the World Bank Institute, and will run in parallel and draw on our eight-week course on Trade, Growth and Poverty, but focusing more on the Gender effects of trade liberalization.
Read more and apply.
Deadline to apply is October 2nd.
Posted by Ignacio on
Mon, 18/09/2006
Posted by Ignacio on
Fri, 15/09/2006
Like every Friday, from Raj Nallari and Breda Griffith's teaching notes.
(This posting draws heavily and exclusively on ‘Microfinance and the Poor – breaking down walls between microfinance and formal finance.’ Littlefield, E. and R. Rosenberg (2004) Finance and Development, June.)
There is a growing awareness that building financial systems for the poor means building sound domestic financial intermediaries that can mobilize and recycle domestic savings of this segment of the population. Microfinance institutions (MFIs) have emerged over the past three decades to address this need and provide financial services to low-income clients who for centuries had to rely on a wide range of informal credit providers such as money lenders.
Early micro-credit agencies operated on nonprofit basis and did not require collateral. They reduced risk through group guarantees, appraisal of household cash flow, and small initial loans to test clients. Experience shows that the poor are reliable in repaying uncollateralized loans and that they are willing to pay a somewhat higher cost for receiving services that would not otherwise be provided by the mainstream banking sector.
The poor need and use a broad range of financial services, including deposit accounts, insurance, and the ability to transfer money to relatives living elsewhere. Experience has shown that the poor can be served profitably, on a long-term basis, and in some cases on a large scale. It has been noted that well-run MFIs can:
- outperform mainstream commercial banks in portfolio quality
- function as a more stable business in turbulent times compared with commercial banking
During Indonesia’s 1997 crisis, for example, commercial bank portfolios deteriorated, but loan repayment among Bank Rakyat Indonesia’s 26 million microclients barely declined. And, during the recent Bolivian banking crisis, MFIs’ portfolios suffered but remained substantially healthier than commercial bank portfolios.
Other studies illustrate the social function of microfinance. Microfinance has been credited with improving a large range of welfare measures such as income stability and growth, nutritional needs, health and school-attendance. It has also been widely credited with empowering women by increasing their contribution to household income and assets.
Moreover, examples of financially sound, professional MFIs suggest that microfinance can be made available for the long term, well beyond the duration of donor government subsidies. There is little doubt that microfinance is highly valued by the poor, as shown by their strong demand for such services, their willingness to pay the full cost of those services and a high loan repayment rate motivated by a desire to have access to future loans.
On the policy level, microfinance has been embraced by politicians and the development community, with the predictable result that some of its merits have been oversold. To achieve its full potential and aim of serving poor households, MFIs will need to become a fully-integrated part of a developing country’s mainstream financial system. Of course this will require financially sound, professional organizations capable of competing, accessing commercial loans, becoming licensed to collect deposits and growing to reach significant scale and impact. The majority of MFIs do not fit into this category – most are weak, heavily donor-dependent and unlikely to ever reach scale or independence.
The commercial success of some MFIs is an encouraging sign for integration into the formal financial system. The form of integration will depend on the country context and the requirements of customers. The options being pursued range from:
- a partnership approach with a commercial bank;
- MFIs seeking their own licenses;
- retailers, consumer finance groups, and other institutions, such as building societies, adopting microfinance methodologies; and
- MFIs tapping into mainstream credit bureaus to increase their productivity, portfolio quality and to reduce their spreads between borrowing and saving rates.
Partnerships enable MFIs to cut costs and extend their reach, while banks can benefit from the opportunity to tap new markets, diversify assets and increase revenues. Partnerships vary in their degree of engagement and risk sharing. In some cases, partnership refers to sharing or renting front offices and in others to banks making actual portfolio and direct equity investments in MFIs. See Exhibit below.
Links between MFIs and Commercial Banks
 Source: Consultative Group to Assist the Poor reproduced in Finance and Development, 2004
Increasing numbers of MFIs are getting their own licenses as banks or specialized financial institutions. This allows them to finance themselves by accessing capital markets and attracting deposits from large institutional investors as well as poor clients. Several MFIs, especially in Latin America have accessed local debt markets by issuing private placements that have been taken up by local financial institutions. Other countries are considering legislation to create new types of financial licenses, usually with lower minimum capital requirements specifically designed for MFIs.
MFIs are beginning to tap into mainstream credit bureaus, which allow their clients to build a public credit history, making them more attractive to mainstream banks and retailers. More than 80 MFIs in Peru are registered to use Infocorp – a private credit bureau. Similarly in Turkey, Maya Enterprise for Microfinance negotiated with a leading bank, Garanti Bankasi, to gain access to the national credit bureau. The central bank in Rwanda requires that MFIs communicate information about their borrowers to a credit bureau.
In general, improvements in information technology help to create new delivery channels for the provision of microfinance. To a large extent, the conduits are already in place – retail shops, Internet kiosks, post offices, lottery outlets – the challenge is to make it possible to provide financial services more cost effectively to the poorer and more sparsely populated areas.
While welcome, such a trend poses risk in terms of the capacity of supervisory authorities becoming overly stretched by taking over responsibility for another financial sector groups. Moreover, creating the infrastructure for specialized MFIs could also divert mainstream commercial banks and others from becoming involved in microfinance. Indeed, retailers, consumer finance institutions and building societies are often better placed to provide the smaller account and transaction sizes required by lower income customers. Advances in new technologies that are driving down costs and risks of providing services to poorer clients also facilitate this.
Next week: Emigrant Remittances
Posted by Ignacio on
Fri, 15/09/2006
The World Bank just released its Worldwide Governance Indicators.
This paper reports on the latest version of the worldwide governance
indicators, covering 213 countries and territories and measuring six dimensions of governance since 1996 until end-2005: voice and accountability political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. The latest indicators are based on hundreds of variables and reflect the views of thousands of citizen and firm survey respondents and experts worldwide. Although global averages of governance display no marked trends over the period 1996-2005, nearly one-third of countries exhibit significant changes -- for better or for worse -- on at least one dimension of governance.
Full report and appendices, as well as a booklet, and the user-friendly interactive access to the updated data and graphics.
Report in English, en français, en español
Posted by Ignacio on
Thu, 14/09/2006
At the World Bank Institute's Trade Department we are organizing this eight-week Internet course (29 Oct. - 22 Dec.) where we will look in detail and from different points of view at the very much discussed relationship between trade liberalization, growth and poverty.
Read more and apply.
Deadline to apply is September 24th.
Posted by Ignacio on
Tue, 12/09/2006
The September issue of Development Outreach is out, focusing on corruption and the private sector.
Guest editors from the World Bank Institute Frannie Leautier, Djordjia Petkoski and Michael Jarvis wonder: Can Private Sector Action Tackle Corruption?
Corruption is an impediment to growth and poverty reduction. As the authors in this issue of Development Outreach well document, corruption limits opportunities, creates inefficiencies and forms additional barriers to the smooth delivery of services. Crucially, from the perspective of the World Bank Group, corruption cumulatively undermines progress towards achieving development objectives, not least as its impact is most adversely felt by the world’s poor.
...
A lot is at stake for the private sector. It is becoming increasingly obvious that the private sector has a critical role to play, alongside more traditional government and civil society actors, in fighting corruption. But why should business care? Continuing to participate in, or turning a blind eye to, corrupt activities can have significant negative consequences for the private sector in terms of competitiveness, the ease of doing business and the sustainability of development efforts.
Also in this issue, available on-line:
Anti-Corruption and Corporate Citizenship
Georg Kell
Civil Society and the Private Sector: Fighting corruption is good business
Huguette Labelle
The Power of Joining Forces: The case for collective action in fighting corruption
Peter Brew
The Importance of Cynicism and Humility: Anti-corruption partnerships with the private sector
Williams S. Laufer
Business as a Partner in Fighting Corruption?
Roderick Hills
Private Sector Response to the Emerging Anti-Corruption Movement
Worth D. MacMurray
The Challenge of Ethical Leadership in Africa
Dele Olojede
Fighting Corruption the Celtel Way: Lessons from the front line
Mohamed Ibrahim
Dealing with Corruption in Ethiopia
Kebour Ghenna
Measuring Corruption: Myths and realities
Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi
Posted by Ignacio on
Mon, 11/09/2006
Joseph Stiglitz's new book "Making Globalization Work" is out. Some of the first reviews are not too positive.
The New York Times reviewed it last week:
IF a prize in politics were awarded for self-righteousness, Joseph E. Stiglitz, despite stiff competition, might be near the top of the list.
And the Economist does it this week:
“Making Globalisation Work” is not a bad book but it arrives after books that are better. Jagdish Bhagwati's arguments are more convincing (“In Defence of Globalisation”), Paul Blustein's reporting is more reliable (“And the Money Kept Rolling In and Out”) and Martin Wolf provides a better guide to the economic research (“Why Globalisation Works”). That Mr Stiglitz, a great and original theorist, should spend his time writing a “me-too” globalisation book rather proves his point that markets sometimes misallocate resources.
Pienso blogs about it and includes links to more reviews and interviews with Mr. Stiglitz.
Posted by Ignacio on
Fri, 08/09/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
The early stage of financial sector reform in developing countries – roughly the period up to the late 1980s – concentrated on liberalizing interest rates, moving to indirect instruments of monetary control, interest rates on reserves and open market operations, dismantling directed credit and opening the capital account. For these reforms to take hold and provide a broader liberalization of the financial sector it was necessary to remove impediments to competition. This amounted to the privatisation of banks and the establishment of entry/exit laws for banks, introducing a level playing field for taxation of banks and other financial intermediaries and establishing foreign ownership laws and allowing foreign entry.
However, under a changing environment in which the world financial markets became more volatile and as inflation pressures in developing countries increased, financial sector reform came to mean something else. Mid-stage financial sector reform sought to strengthen financial sector infrastructure and individual institutions. Macroeconomic stability and real sector reform was crucial to these requirements. In practical terms, financial sector reform expanded to include:
- Legal framework for the central bank through the establishment of independent central banks enshrined in legislation
- Legal framework for banks through the establishment of prudential regulations and banking company law
- Regulatory framework for non-banking sector through the establishment of rules governing the ratio of nonbank assets to financial sector assets and the number of listed companies on the stock exchange
- Identification of rights and obligations of financial agents through the establishment of liquidation and bankruptcy laws, payment systems, accounting and auditing standards
Strengthening individual financial institutions required the establishment and enforcement of guidelines for supervision, restructuring and institutional reforms as summarised here:
- Strengthening of banking supervision – establishing guidelines for: the capacity and authority to supervise; licensing criteria; and supervision systems.
- Bank restructuring – establishing guidelines for capital replenishment, asset liquidation and privatisation.
- Bank institutional reforms – establishing management information systems and human resource development programs.
The need for what may be termed ‘latter stage financial sector reform’ became apparent in the wake of the Asian financial crisis. The crisis demonstrated the links between the corporate and financial sectors and the adverse consequences that ensue when the corporate and financial sectors are at different stages of reform. Moreover the crisis demonstrated the need for greater transparency and accountability, sequencing and ownership. With regard to the latter, financial sector reform represents an especially difficult challenge because oftentimes owners and those with political power are closely connected.
Improving transparency and accountability requires improved disclosure of macroeconomic information, improved disclosure requirements for securities markets participants, improved investor education, establishment of rating agencies and credit bureaus and transition to global accounting and auditing standards. The sequencing or phasing of reforms will only be successful when certain conditions are in place. For example:
- Interest rate deregulation should only be pursued when:
- The regulatory framework is sound
- Bank supervision is effective
- Accounting and auditing systems are adequate
- Financial markets are competitive
- Banks have positive net worth and capable management and staff
- Recapitalization of banks should be preceded by a change in the system that allows banks to lose their capital in the first place:
- Putting a stop to lending to defaulters
- Strong bank supervision and monitoring
- Adequate information systems should be put in place
- Management of insolvent banks should be changed
- State-owned banks should be part of a privatization plan
Next week: Microfinance and the poor
Posted by Ignacio on
Thu, 07/09/2006
Lawrence Summers delivered today at the World Bank his presentation “Almost a Free Lunch: Investing Foreign Exchange Reserves in Global Equity Markets”, following similar presentations at the Reserve Bank of India in Mumbai or at the Center for Global Development in Washington DC.
Mr. Summers claims that the flow of capital today is exactly the opposite of what the “International Financial Architecture” had in mind after the World War. Today we see a net flow of capital from the poorer to the richer countries. In particular, large amounts from developing countries are being accumulated as reserves in US Treasury Bonds.
He sees two main problems here:
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The amounts that are being kept as reserves in developing countries are too big.
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These reserves in US Treasury Bonds have a very low real rate of return, close to zero.
The gap between the return obtained at a typical central bank or what could be obtained with a typical pension portfolio or in stock is around 4 % or 5 % respectively (this gap would be of around 10 % if compared to the return of Harvard’s endowment while he was President).
Therefore, we have some of the most rapidly growing economies in the world, with high percentages of their populations living in poverty, with a “fair amount of money deployed in clearly suboptimal investment”.
And what is the cost of this excess of reserves invested in low yielding US Treasury Bonds? The excess of reserves for the 121 developing countries is, according to Mr. Summers, around $ 2 trillion, or 19 % of their combined GDP. If developing countries where able to deploy 10 % of their GDP in global equity markets that produced a 5 % extra return, the amount earned would clearly exceed the amount spent in foreign aid worldwide.
Food for thought …
Posted by Ignacio on
Wed, 06/09/2006
Posted by Ignacio on
Tue, 05/09/2006
Oxfam released last week its new report: In the Public Interest.
In the report, prepared in collaboration with WaterAid, they argue that classrooms with teachers, clinics with nurses, running taps and working toilets are basic public services key to ending global poverty. The report goes on to affirm that only governments are in a position to deliver them on the scale needed to transform the lives of millions living in poverty.
This report shows that developing countries will only achieve healthy and educated populations if their governments take responsibility for providing essential services. Civil society organizations and private companies can make important contributions, but they must be properly regulated and integrated into strong public systems, and not seen as substitutes for them. Only governments can reach the scale necessary to provide universal access to services that are free or heavily subsidized for poor people and geared to the needs of all citizens – including women and girls, minorities, and the very poorest. But while some governments have made great strides, too many lack the cash, the capacity, or the commitment to act.
Rich country governments and international agencies such as the World Bank should be crucial partners in supporting public systems, but too often they block progress by failing to deliver debt relief and predictable aid that supports public systems. They also hinder development by pushing private sector solutions that do not benefit the poor.
Our friends from the Private Sector Development Blog blogged about it.
Posted by Ignacio on
Sat, 02/09/2006
This week the Fridays Academy series falls on a Saturday (sorry for the delay)
From Raj Nallari and Breda Griffith's lecture notes:
Policy Measures to Increase Access to Financial Services
Although, as we have seen, financial services can have very beneficial effects, usage of financial services in developing countries is far from universal, as Claessens (2005) discusses. Instead, financial systems are often skewed towards the better off, catering mainly to large enterprises and wealthier individuals, and allocated on the basis of connections and non-market criteria. Often, many segments of the enterprise and household sectors suffer from lack of access to finance at reasonable cost, hindering growth. Claessens finds that for most developing countries, basic bank account usage does not exceed 30 percent of households, and in the lowest-income countries, usage is less than 10 percent.
Although low usage levels may reflect lack of demand rather than lack of access, Claessens argues that this is unlikely to be the case in many developing countries, simply because usage is so low. If supply of financial services is limited, as appears to be the case, is this because banks are unwilling to supply financial services because of the perceived poor quality of many customers? Or are there barriers to supply and, if so, can these be removed? Or is there some form of “market failure” that government intervention can address?
Lack of demand can arise if financial services are too costly and not well tailored to customer needs. If this is the case, households and firms may rely instead on informal forms of finance. But there are some grounds for hope here. For instance, in 2004 in South Africa, the country’s major banks launched a low-cost bank account aimed at extending banking to low-income households. Reportedly, initial take up has been very high. The sharp drop in the costs of international remittances also suggests that banking services are being extended at a more reasonable cost to wider segments of the population.
Turning to supply barriers, we will shortly discuss micro-finance developments, the main movement towards extending the provision of credit in developing countries. Also on the supply side, in developing countries the use of savings and payments services can be provided through postal and saving banks.
More generally, for a sample of more than 90 countries, Beck, Demirguc-Kunt and Soledad Martinez Peria (2005) show those countries with better developed financial systems have services that are more evenly distributed among banking clients. This suggests that the overall institutional environment can play a role in the supply of banking services. It has also been shown that the quality of legal systems, property rights, and the presence of reliable information mechanisms are especially important for the supply of credit to small firms. Banking system regulations can also hinder usage. For instance, interest rate or legal lending restrictions can make it difficult for financial services providers to offer profitable saving or lending instruments.
Against this backdrop, better legal, information, payments systems, distribution and other infrastructures appear to be needed in many developing counties. Many of these reforms are, however, difficult and time-consuming. To complement these policies, Honohan suggests that another important way to enhance access—and one that is often easier than improving the institutional environment—is to improve competition in banking systems. For instance, smaller and non-bank financial institutions (including department stores) can be allowed greater use of existing financial networks. Allowing greater entry by foreign banks can further enhance competition and access to banking services by the population at large. Claessens cites the example of Mongolia where the failed government-owned Agricultural Bank was sold to a Japanese investor and became a highly successful bank providing far greater access to the population at large than previously. Foreign ownership can also induce greater financial stability and improve the overall efficiency of financial intermediation.
Whether universal usage should be a public policy goal is, however, an open question. The fact that the poor do not use financial services may be more a problem of poverty than a problem of access. Also, there is as yet insufficient knowledge at the micro-level of what the benefits and impacts of finance are. For example, access to credit may be a problem when it leads to over-indebtedness, as poor can be uninformed and overborrow, often at unfavorable terms. General public interventions can nevertheless be useful in some cases, but will need to be carefully introduced. Governments can try to make social security, tax and other payments in such a way as to encourage more bank access, by making them electronic to the extent feasible. Authorities can also mandate banks to provide minimum banking services for otherwise excluded segments of the market.
Next week: A Brief History of Financial Sector Reform in Developing Countries
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