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Submitted by David J. McKenzie on
This blog post simplifies the results of an already simplistic model presented in the paper, and therefore pushes an argument that seems irrelevant for most developing countries. As the paper itself shows, once you allow for heterogeneity in producers and for capital supply to not be inelastic, financial intermediation both leads to an increase in the size of overall production in a country, and a reallocation of capital from less to more productive producers. So some financial intermediation is better than none. However, the paper then claims that there is still the possibility of too much financial intermediation since it involves a cost, and each individual who borrows doesn’t take account of the fact that part of his or her actions are to bid up the price of capital for others. But to move from this theoretical result to suggesting that there is room for government intervention to restrain access to finance is many steps too far – once one introduces all the other frictions of reality that constrain access to finance into the model, it seems much more likely that most countries are in a situation of far too little financial intermediation still – unfettered and excessive access to finance is hardly the concern of most developing countries the World Bank deals with.