This week’s FPD Chief Economist Talk featured Sendhil Mullainathan, Professor of Economics at Harvard University and co-founder of Ideas42, a non-profit that uses insights from behavioral economics to inform the design of products, innovations and policies. Sendhil is well known as one of the leading thinkers in behavioral economics and much of his research has focused on topics at the intersection of psychology and development economics, ranging from corruption in the allocation of drivers’ licenses to the role of psychology in the take-up of micro-finance and consumer loans — all very important issues that matter for what we do at the Bank and so Sendhil’s talk provided great food for thought!
What would the United States look like without a financial industry? This question is the starting point of my recent paper, “Should Wall-Street Be Occupied? An Overlooked Price Externality of Financial Intermediation.” At first glance, the recent crisis suggests a grim answer to this question. As financial activity collapsed, the real economy halted. Lack of financing was associated with record-level unemployment, low investment, and overall reduction in economic activity.
Much of the thinking about the social value of finance has been framed in these terms: we know that finance is important because it performs many socially useful roles, and when financing “dries up,” the economy suffers. However, this logic is somewhat flawed, because the consequences of a shock to financing may be different from a permanent reduction in financing. Equating the two is similar to equating the mental state of someone who just got divorced with the mental state of someone who is single: disappearance is very different from absence, because presence creates dependence. Once you have a spouse, you become emotionally attached, as well as financially and logistically dependent. Once that spouse leaves, it may be difficult to re-adjust.
After finding that gifts of capital had no impact on the growth of female-owned subsistence firms in Sri Lanka and Ghana, in a recent paper (with Chris Woodruff and Suresh de Mel) I test whether business training can help poor women in Sri Lanka start and grow their businesses. A new 2-page impact note summarizes the results of the full paper. The even shorter version is that the ILO’s Start and Improve Your Business Training:
- has no significant impact on the survival or growth of existing subsistence enterprises run by women in either the short or the medium run.
- Speeds up entry into business of women out of the labor force who would like to start businesses, although the control group catches up after a year.
- Leads to less analytically skilled women starting new businesses.
- Makes the new businesses started by women more profitable
A recession is a difficult time to start a business. Credit is tight, consumers are wary, and the future appears uncertain. It seems logical that entrepreneurs would have been deterred from starting a new business during the 2008-09 global financial crisis, but how widespread was this phenomenon, and are there signs that new firm creation has begun to recover? The 2012 Entrepreneurship Database released today provides a novel look at these trends.
The Eurozone crisis has gone through its fair share of buzz words — fiscal compact, growth compact, Big Bazooka. The latest kid on the block is the banking union. Although it has been discussed by economists since even before the 2007 crisis, it has moved up to the top of the Eurozone agenda. But what kind of banking union? For whom? Financed how? And managed by whom?
A new collection of short essays by leading economists on both sides of the Atlantic — including Josh Aizenman, Franklin Allen, Viral Acharya, Luis Garicano, and Charles Goodhart — takes a closer look at the concept of a banking union for Europe, including the macroeconomic perspective in the context of the current crisis, institutional details, and political economy. The authors do not necessarily agree and point to lots of tradeoffs. However, several consistent messages come out of this collection:
In September 2008, the collapse of the Lehman Brothers investment bank precipitated a financial crisis and a sharp decline in international credit. Massive layoffs and an economic recession in the U.S. and many industrialized and developing countries ensued. In some countries, however, the effects of the financial crisis were limited and short-lived. This was true for Brazil and China, both of which continued to experience high rates of economic growth in subsequent years. A cited reason for these countries’ relative success during this period has been government involvement in the banking sector 1.
The recent global financial crisis reignited the debate on the ownership structure of the banking sector and its consequences for financial intermediation. Some have pointed to the presence of foreign banks in developing countries as a key mechanism for transmitting the 2008-2009 crisis from advanced to developing countries (e.g., IMF, 2009). At the same time, developing countries like Brazil, China, and India, where government-owned banks are systemically important, recovered quickly from the crisis, generating interest in the potential mitigating role that these banks can play during periods of financial distress. 
How do financial systems around the world stack up? Which one has the highest number of bank accounts per capita? Where in the world do we find the lowest interest rate spreads, and where are they the highest? Which country has the most active stock market? Has competition among banks increased or decreased in recent years? Are financial institutions and financial markets in developed economies more or less stable than those in developing ones? Answers to these and many other interesting questions can be found in the Global Financial Development Database, accompanying the 2013 Global Financial Development Report. Both the database and the report were published earlier this month.
The U.S. Federal Deposit Insurance Corp. released a study yesterday reporting that 17 million adults – or 7% of the adult population - live in an unbanked household. In fact, because they use the household as the unit of measurement, the FDIC considers this to be a lower-bound estimate of the number of unbanked adults living in America. The finding is therefore consistent with the World Bank Development Research Group’s Global Findex database which finds that 12% of American adults are unbanked. Both data sources consider an adult to be unbanked if they do not have an account at a formal financial institution.
The failure of the investment banking giant Lehman Brothers on September 15, 2008 marked the onset of the largest global economic meltdown since the Great Depression. The crisis has prompted many people to reassess state interventions in financial systems, from regulation and supervision of financial institutions and markets, to competition policy, to state guarantees and state ownership of banks, and to enhancements in financial infrastructure. But the crisis does not necessarily negate the considerable body of evidence on these topics accumulated over the past few decades. It is important to use the crisis experience to examine what went wrong and how to fix it. This is the motivation of the World Bank’s Global Financial Development Report, released this week, on the fourth anniversary of the Lehman failure.