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Financial Sector

Business Environment Reforms: Distinguishing Tokenism from the Real Thing

Inessa Love's picture

To promote the registration of new firms, many countries have been undertaking reforms to reduce the costs, days or procedures required to register a business. For example, the World Bank Doing Business report each year identifies the 10 most improved countries on the overall Doing Business index (comprised of 9 subindicators). One of these subindicators measures reforms related to starting a business, with 30-65 countries reforming in this area each year. A still unanswered question is whether some reforms are more important than others. A priori, it is not clear what magnitude of reduction in costs (or days or procedures) is necessary to create a significant impact on firm registration. In other words, what exactly constitutes a reform? Is a 20% reduction in the costs of registration sufficient, or is a 50% reduction necessary to get a substantial number of firms to register?

In a recent paper Leora Klapper and I empirically investigate the magnitude of reform required for a significant impact on the number of new registrations. We use a new dataset that is uniquely suited for this purpose: the World Bank Group Entrepreneurship Snapshots (WBGES), a cross-country, time-series panel dataset on the number of newly registered companies. We supplement it with data from Doing Business reports that contain the cost, time and procedures required for registration of new companies. Importantly, both datasets focus on limited liability companies. In an earlier paper, we used the same dataset to investigate the impact of the global financial crisis on new firm registrations

Did Yesterday’s Patterns of Colonial Exploitation Determine Today’s Patterns of Poverty?

Miriam Bruhn's picture

Several economists have argued that cross-country differences in economic development today have their roots in the colonial era. For example, Engerman and Sokoloff (1997, 2002)—henceforth referred to as ES—argue that different types of economic activities that the colonizers engaged in led to different growth paths. They claim that the link between colonial activities and current-day levels of economic development is as follows. In many areas, colonial society was very unequal, giving political rights only to a few landowners, while repressing most of the population through slavery or forced labor. Consequently, institutions that developed during colonial times were designed to protect the rights of only a few. These institutions persist until today and constrain economic development. To give one example, many Latin American banking systems developed primarily to serve a wealthy elite, restricting access to finance for the rest of the population.

In a paper I recently co-authored with Francisco Gallego, we test empirically whether areas with different types of colonial activities do indeed have different levels of economic development today. We use within-country data for 345 regions in seventeen countries in the Americas to do this. We rely on within-country data because colonial activities varied considerably even within countries (for example, the northeast of Brazil grew sugar, while many states in central and southern Brazil had large cattle ranches). Moreover, in our sample, levels of development vary almost as widely within countries (between regions) as they do between countries.

The Global Financial Inclusion Indicators: An Important Step towards Measuring Access to Finance

Asli Demirgüç-Kunt's picture

How inclusive are financial systems around the world? What proportion of the population uses which financial services? Despite all the work we have done so far, most of the figures cited by experts in this field are still just estimates (see, for example, here and here). But this is about to change—in a big way.

To help us understand the scope and breadth of financial activity by individuals around the world, the Bill & Melinda Gates Foundation today announced an $11 million, 10-year grant to the World Bank’s Development Research Group to build a new publicly accessible database of Global Financial Inclusion Indicators. The ultimate goal of the project is to improve access to finance; achieving this goal requires reliably measuring financial inclusion in a consistent manner over a broad range of countries and over time to provide a solid foundation of data for researchers and policymakers. We will carry out three rounds of data collection, starting with Gallup, Inc’s 2011 Gallup World Poll, which will survey at least 1,000 people per country in 150 countries about their access and use of financial services.

Islamic Banking: Can it Save Us from Crises?

Asli Demirgüç-Kunt's picture

Pundits in the financial press have been asking an intriguing question: if too much debt and insufficient equity was partly responsible for the financial crisis, might Islamic banking be part of the solution? After all, Islamic principles require that financial transactions cannot include interest rate payments on debt, but rather have to rely on profit-loss risk-sharing arrangements (as in equity). For example, demand deposits that do not pay interest are fine, but savings deposits generally participate in the profits of the bank since these cannot accrue interest. Lending also generally follows a partnership model where the bank provides the resources and the client provides effort and expertise, and profits are shared at some agreed ratio. So can the heightened risk-sharing required by Sharia curb excess risk-taking by banks?

In practice Islamic scholars have also developed products that resemble those offered by conventional banks, replacing interest rate payments and discounting with fees and contingent payment structures. Nevertheless, Islamic banking still retains a strong element of equity participation. How does this affect bank risk-taking? Conceptually, the answer is not immediately clear. On the one hand, the equity-like nature of savings instruments may increase depositors’ incentives to monitor and discipline banks. On the other hand, if deposit instruments are equity-like, banks’ incentives to monitor and discipline borrowers may also be reduced since banks no longer face the threat of immediate withdrawal. Similarly, the equity-like nature of partnership loans can reduce the important discipline imposed on entrepreneurs by debt contracts.

The Challenges of Bankruptcy Reform

Leora Klapper's picture

The 2008 financial crisis precipitated a global economic downturn, credit crunch, and reduction in cross-border lending, trade finance, remittances, and foreign direct investment, which all adversely affected businesses around the world. The increase in the number of distressed firms has made policymakers more concerned about the effectiveness of existing bankruptcy regimes, including both the laws that address reorganization and liquidation, as well as improved enforcement of laws in court.

In a recent paper with Elena Cirmizi and Mahesh Uttamchandani, my co-authors and I summarize the theoretical and empirical literature on designing bankruptcy laws; discuss the challenges of introducing and implementing bankruptcy reforms; and present examples of the most recent reforms in this area from around the world. As policymakers use the current recession as an opportunity to engage in meaningful reform of the bankruptcy process, it is important to assess experiences from previous crises.

Reforming Global Finance: What is the G20 Missing?

Franklin Allen's picture

Editor's Note: Professor Franklin Allen came to the World Bank on October 27 to give an FPD Chief Economist Talk on the topic of Reforming Global Finance: What is the G20 Missing? Please see the FPD Chief Economist Talk page to download a copy of his presentation and watch a video of his Talk.

The recent financial crisis clearly had more than one cause. My view is that the most important one was a bubble in real estate prices, not only in the US but also in a number of other countries such as Spain and Ireland. It was the bursting of this bubble that has led to so many problems in the world economy. A significant part of this is a direct effect on the real economy rather than an effect transmitted through the financial system. For example, Spain had one of the best regulated banking systems and its banks did much better than in other countries. Yet with a doubling of its unemployment rate to 20 percent, its real economy has been devastated. In contrast countries like Germany that did not have a real estate bubble but had much larger drops in GDP have not suffered nearly as much. Germany's unemployment rate is now lower than at the start of the crisis.

Credit Where Credit is Due: Partial Credit Guarantee Schemes in the Middle East and North Africa

Roberto Rocha's picture

Editor's Note: The following post was submitted jointly by Youssef Hassani, Economist, MENA, Zsofia Arvai, Senior Financial Economist, MENA, and Roberto Rocha, Senior Adviser, MENA.

Many countries in the Middle East and North Africa (MENA) region have established partial credit guarantee schemes (PCGs) to facilitate SME access to finance. These guarantee schemes can potentially play an important role, especially in a period where MENA governments are still making efforts to reduce risks for lenders by improving the effectiveness of credit registries and bureaus and strengthening creditor rights. However, the contribution of credit guarantee schemes to SME finance depends largely on their design. 

Well designed schemes may be able to achieve significant outreach and additionality, i.e. benefit a significant number of SMEs that have substantial growth potential but are effectively credit constrained due to lack of credit information and collateral. In some countries PCGs have also played an important capacity-building role. By contrast, poorly designed guarantees schemes may have a limited development impact by providing guarantees to firms that are not credit constrained. PCGs may also accumulate losses by providing overly generous and underpriced guarantees, and ultimately become a burden to public finances.

The Chrysler Effect: The Impact of the Chrysler Bailout on Borrowing Costs

Deniz Anginer's picture

Did the bailout of Chrysler by the U.S. government overturn bankruptcy law in the United States?

Almost two years ago, the outgoing Bush and incoming Obama administrations announced a series of steps to assist Chrysler, the struggling automaker, in an extraordinary intervention into private industry. The federal government intervened in Chrysler’s reorganization in a manner that, according to many analysts, subordinated the senior secured claims of Chrysler’s lenders to the unsecured claims of the auto union UAW. As one participant interpreted the intervention, the assets of retired Indiana policemen (which were invested in Chrysler’s secured debt) were given to retired Michigan autoworkers.

Critics claim that the bailout turned bankruptcy law upside down, and predicted that businesses would suffer an increase in their cost of debt as a result of the risk that organized labor might leap-frog them in bankruptcy. A long-standing principal of bankruptcy law requires that a debtor’s secured creditors be repaid, in full, before its unsecured creditors receive anything.

The Impact of the Crisis on New Firm Registration

Leora Klapper's picture

With millions around the globe feeling the impact of the financial crisis and slower economic growth and job losses, it is important to understand regulatory and policy constraints on entrepreneurs wanting to start a formal business. Entrepreneurial activity is the basis of sustainable economic growth, and the first step for entrepreneurs joining or transitioning to the formal sector is the registration of their business at the registrar of companies. For evidence of the economic power of entrepreneurship we need look no further than the United States, where young firms have been shown to be an important source of net job creation, relative to incumbent firms (Haltiwanger, et al.).

To measure entrepreneurial activity, we’ve constructed with support from the Kauffman Foundation the World Bank Group Entrepreneurship Snapshots (WBGES) – a cross-country, time-series dataset on new firm registration in 112 countries. The main variable of interest is “Entry Density”, defined as the number of newly registered limited liability firms as a percentage of the working age population (in thousands). We employ annual figures from 2004 to 2009 collected directly from Registrars of Companies and other government statistical offices worldwide. Like the Doing Business report, the units of measurement are private, formal sector companies with limited liability.

FDI in Southern Africa: Microeconomic Consequences and Macro Causes

Foreign direct investment (FDI) can theoretically reduce income gaps between developing and advanced economies. In a neoclassical world, with perfect capital mobility and technology transfer, capital readily flows from rich to poor countries, seeking higher returns in capital-scarce economies. The real world differs starkly from the theory.

Even though southern African countries (the Southern African Development Community, SADC hereafter) are poor on average, per capita FDI inflows are a meager 36.6 U.S. dollars per year (in 2000 value), which is about 18 percent of average per capita FDI in non-SADC countries and 58 percent of the average level for similar-income economies. Moreover, within SADC, country differences are huge: FDI per capita ranges from single digits (Malawi, Zimbabwe, Madagascar, Democratic Republic of Congo, and Tanzania) to 10-30 dollars (Mozambique, Zambia, Mauritania, and Swaziland), to 50 to 100 dollars (Lesotho, South Africa, and Angola), and to 167 dollars in the outlier in this region, middle-income Botswana. And even within this region there is a positive relationship between average income and FDI per capita, a pattern that holds for the world as a whole. Thus, any hope of relying on FDI as a supply-side remedy to catapult poor countries onto a development fast track is not likely to materialize soon.

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