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December 2011

Triggering Disruptive Innovation in Retail Banking in the Digital Age

Ignacio Mas's picture

See what a profound transformation the internet is producing in information-based sectors. Newspapers are under threat from online news sources and blogs. These same web destinations are becoming less relevant as people simply lift and filter the information they want using RSS feeds. The music CD is being unbundled as customers buy individual tracks online. These songs get remixed and re-distributed across an ever-growing number of online content repositories. Books are increasingly digitized, and customers can now sample content and search for information across entire libraries.

The internet is a destroyer of digital products but a great creator of new kinds of customer experiences. Power has shifted to users: it’s no longer about the packages of content suppliers want to sell but about the content mash-ups users want to consume. Providers’ best response is to try to extract more customer information with each interaction, and use that to deliver even more relevance and convenience to their customers. Think Google and Apple and Amazon: the new corporate battlefield lies in the control of the user interface and the customer intelligence system that supports it.

Yet there is one information-based sector that seems deaf to the great sucking sound of the internet: banking. What is banking but managing information of who has what financial claims on whom? For banking, the internet truly is still just another channel. Sure, it has added transactional convenience, but has it changed how banks talk to us?

What Do We Know about the Impact of Tax Reforms on Private Sector Development?

Miriam Bruhn's picture

I recently conducted a literature review on the impact of tax reforms on private sector development as part of the Investment Climate Impact Project.1 My goal was to take stock of what is currently known about the impact of reforms that the World Bank is supporting in this area and to identify the gaps in knowledge that we ought to fill by conducting more impact evaluations. While tax reforms can have a broad range of effects in the economy, the focus here was on private sector outcomes only, as measured by investment, tax evasion by formal firms, formal firm creation, and firms’ economic performance.

It turns out that most papers in this area study the impact of changing tax rates. Both cross-country and micro-level  studies suggest that lowering tax rates can increase investment, reduce tax evasion, promote formal firm creation and ultimately lead to an increase in firms’ sales and GDP growth overall. However, lowering tax rates also has important implications for government revenue and it is thus often difficult to balance the trade-offs between various goals of public policy.

Financial Development in Latin America and the Caribbean: The Road Ahead

Augusto de la Torre's picture

This is not exactly the perfect moment for banks to take on new risks. In such a volatile economic climate as today’s, the seemingly prudent thing would be to do very little. But, in a new World Bank report, Financial Development in Latin America and the Caribbean: The Road Ahead, we argue that the time is right for the financial sector in Latin America and the Caribbean (LAC) to expand sustainably in new directions, to boost economic activity and financial inclusion.

LAC has demonstrated a strong financial footing, having weathered the global crisis of 2008-2009 better than most. After a history of recurring instability, the region’s strengthening of macroeconomic and financial oversight policies helped prevent toxic loans and U.S.-style bubbles. In fact, during the 1980s and 90s, the financial sector was the region’s Achilles heel. Ever since, the financial systems have grown and deepened, becoming more integrated and competitive, with new actors, markets, and instruments flourishing. Now that the successes of LAC’s macro-financial stability are widely recognized and tested, we believe it is the right time to move forward with a broader agenda.

But greater financial stability and resilience has not translated into increased financial services, as compared to the world. Even when savings have accumulated and funds are available for investment.

Should Development Organizations be Hunting Gazelles?

David McKenzie's picture

Last week I presented some early findings from ongoing work at the IADB, at Innovations for Poverty Action’s SME initiative inaugural conference. There was a lot of interesting discussion about early results from efforts to improve management and skills in small and medium firms, discussion of the most appropriate ways of financing these firms and the extent to which a personal vs automated approach to determining creditworthiness can be used, and an interesting panel on policies towards the missing middle. However, the one theme that has got me thinking the most is something that seems to come up a lot in discussions of microenterprise development and SME programs recently, namely should development institutions and policymakers be directing fewer resources at microfirms and more at high-growth-potential enterprises or gazelles?

Gazelles are defined by the OECD to be all enterprises up to 5 years old with average annualised growth greater than 20% per annum, over a three year period, and which have 10 or more workers. Recent work in the US, and looking at firms around the world have emphasized the role of a subset of dynamic, fast-growing young firms in net job creation, leading to policymakers and practioners focused on job creation to think we should be devoting more effort to identifying and supporting these gazelles, and decrying the lack of venture capital markets in developing countries. For example, see this scoping note by Tom Gibson and Hugh Stevenson at the IFC.

Informal Networks and Shadow Banking: Policy Implications

Robert Townsend's picture

Panel data can be used to measure directly or infer indirectly the presence and role of informal financial networks. In the Townsend Thai data (a collection of over 12 years of annual panel data for 900 households in 64 Thai) villages, networks are shown to play a beneficial role in smoothing consumption and investment against income and cash flow fluctuations. Villagers who lack formal financial access but are indirectly connected through networks receive the benefits of the formal financial system. Surveys of financial access  that ignore these networks can understate the reach of financial access while hiding the needs of the truly vulnerable (e.g., poor households without any kin in their village). Complementarities between the formal financial system and informal networks show up in bridge loans for repayment and the transactions demand for cash, revealing highly active informal money markets.

The same logic and data make labor supply and hours data conform with those of a sophisticated risk syndicate and make the rate of returns on investment/occupations conform with the theory of modern finance—in particular a capital asset pricing model applied to technologies/occupations with common market/village risk. We found that families engaged in occupations like rice farming require a higher expected return because this activity does well only when the village as a whole is doing well, and conversely occupations which are not covariate with market risk are recognized as particularly valuable. However, heterogeneous risk preferences creates a policy warning: outside insurance targeting village/market risk can actually make some in a village worse off, those had been providing insurance to others.