Journal Issue: World Bank Economic Review, Volume 27, Issue 3
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Volume
27
Number
3
Issue Date
Journal Title
Journal ISSN
1564-698X
Journal
World Bank Economic Review
1564-698X
Journal Volume
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Articles
Financial Development : Structure and Dynamics
(Oxford University Press on behalf of the World Bank, 2013-09) Feyen, Erik; de la Torre, Augusto; Ize, Alain
This paper analyzes the process of financial development over the last three to four decades from the perspective of the fundamental frictions (agency and collective) to which economic agents were exposed. A comprehensive statistical benchmarking analysis showed that financial development followed regular dynamics that can be largely explained by the underlying frictions. In particular, the sequencing, returns to scale, and shape of the developmental paths for various types of financial activities—including public debt, banking, insurance, asset management, and capital markets—broadly matched benchmark predictions. Reflecting financial innovation and the dynamic interaction between financial and economic development, financial development paths were also found to be strongly dependent on initial conditions. At the same time, policy differences, including the failure to improve the quality of the enabling environment and prevent financial crashes (the dark side of finance), were found to explain a sizable share of the deviations of individual country paths from the benchmarks.
The Evolving Importance of Banks and Securities Markets
(Oxford University Press on behalf of the World Bank, 2013-09) Feyen, Erik; Demirgüç-Kunt, Asli; Levine, Ross
The roles of banks and securities markets evolve during the process of economic development. As countries develop economically, (1) the size of both banks and securities markets increases relative to the size of the economy, (2) the association between an increase in economic output and an increase in bank development becomes smaller, and (3) the association between an increase in economic output and an increase in securities market development becomes larger. These findings are consistent with theories predicting that as economies develop, the services provided by securities markets become more important for economic activity, whereas those provided by banks become less important.
Financial Structure and Economic Development : A Reassessment
(Oxford University Press on behalf of the World Bank, 2013-09) Cull, Robert; Demirgüç-Kunt, Asli; Lin, Justin Yifu
In this article the authors use quantile regressions to assess the relationship between economic and financial development at each percentile of the distribution of economic development. Thus; the quantile regressions provide information on how the associations between economic development and both bank and securities market development change as countries grow richer.
Water Nationalization and Service Quality
(Oxford University Press on behalf of the World Bank, 2013-09) Borraz, Fernando; Gonzalez Pampillon, Nicolas; Olarreaga, Marcelo
The objective of this paper is to explore the impact of Uruguay's privatization and subsequent nationalization of water services on network access and water quality. The results suggest that although the early privatization of water services had little impact on access to the sanitation network; the subsequent nationalization led to an increase in network access at the bottom of the income distribution as well as an improvement in water quality.
Mass Media and Public Policy : Global Evidence from Agricultural Policies
(Oxford University Press on behalf of the World Bank, 2013-09) Olper, Alessandro; Swinnen, Johan
Mass media play a crucial role in information distribution and in the political market and public policy making. Theory predicts that information provided by the mass media reflects the media's incentives to provide news to different groups in society and affects these groups' influence in policy making. We use data on agricultural policy from 69 countries spanning a wide range of development stages and media markets to test these predictions. Our empirical results are consistent with theoretical hypotheses that public support for agriculture is affected by the mass media. In particular; an increase in media (television) diffusion is associated with policies that benefit the majority to a greater extent and is correlated with a reduction in agriculture taxation in poor countries and a reduction in the subsidization of agriculture in rich countries; ceteris paribus. The empirical results are consistent with the hypothesis that increased competition in commercial media reduces transfers to special interest groups and contributes to more efficient public policies.
Liability Structure in Small-Scale Finance : Evidence from a Natural Experiment
(Oxford University Press on behalf of the World Bank, 2013-09) Carpena, Fenella; Cole, Shawn; Shapiro, Jeremy; Zia, Bilal
Microfinance, the provision of small individual and business loans, has experienced dramatic growth, reaching over 150 million borrowers worldwide. Much of the success of microfinance has been attributed to attempts to overcome the challenges of information asymmetries in uncollateralized lending. However, very little is known about the optimal contract structure of these loans; and there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. We find evidence that the lending model matters: for the same borrower, the required monthly loan installments are 11 percent less likely to be missed under the group liability setting in comparison with individual liability. In addition, compulsory savings deposits are 20 percent less likely to be missed under group liability contracts.
Notes on Financial System Development and Political Intervention
(Oxford University Press on behalf of the World Bank, 2013-09) Song, Fenghua; Thakor, Anjan
We study the impact of political intervention on a financial system that consists of banks and financial markets and develops over time. In this financial system, banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is generated by two new ingredients of financial system architecture relative to the existing theories: securitization and risk-sensitive bank capital. We show that securitization propagates banking advances to the financial market, permitting market evolution to be driven by bank evolution, and market advances are transmitted to banks through bank capital. We then examine how politicians determine the nature of political intervention designed to expand credit availability. We find that political intervention in banking exhibits a U-shaped pattern, where it is most notable in the early stage of financial system development (through bank capital subsidy in exchange for state ownership of banks) and in the advanced stage (through direct lending regulation). Despite expanding credit access, political intervention results in an increase in financial system risk and does not contribute to financial system evolution. Numerous policy implications are drawn out.
Job Growth and Finance : Are Some Financial Institutions Better Suited to the Early Stages of Development than Others?
(Oxford University Press on behalf of the World Bank, 2013-09) Cull, Robert; L. Colin, Xu
Evidence based on firm-level data from 89 countries with updated country-level data on financial structure suggests that in low-income countries; labor growth is more rapid in countries with a higher level of private credit/GDP. This positive relationship with private credit is especially pronounced in industries that depend heavily on external finance. The results, which are robust to multiple estimation approaches, are consistent with the predictions of new structural economics. In high-income countries, labor growth rates increase with the level of stock market capitalization, consistent with predictions from new structural economics. However, the association disappears when stock market development is treated as an endogenous explanatory variable using instrumental variable regressions. There is no evidence that small-scale firms in low-income countries benefit the most from the development of the private credit market. Rather, the labor growth rates of larger firms increase to a greater extent than others with the level of private credit market development, a finding consistent with the perspective from historical political economy that banking systems in low-income countries serve the interests of the elite rather than providing broad-based access to financial services.