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Unexploited Gains from International Diversification: Patterns of Portfolio Holdings around the World

Sergio Schmukler's picture

The increase in global financial integration over the last twenty years has been remarkable, and U.S. institutional investors have been significant participants in this growth. Given standard economic theory, one would expect to see greater international diversification accompanying the expansion of global investment opportunities. To date, however, evidence on how investors actually allocate their portfolios around the world and what determines it is still limited.

In a joint paper with Roberto Rigobon, we aim to fill the gap in the literature by constructing a unique micro dataset of asset-level portfolios for a group of important institutional investors, namely US mutual funds with international investments. To shed light on the drivers of globalization and investment across countries, we explore the structure of mutual fund families. We make within-family comparisons of the behavior of “specialized funds,” which can invest only in certain countries or regions, and “global funds,” which can invest anywhere in the world and thus have access to a larger set of instruments (more firms from more countries).

Reducing the Infant Mortality of African Exports: The role of information spillovers and network effects

Leonardo Iacovone's picture

Helping African exporters survive in international markets should be a high-priority item on the agenda of development agencies. African exports suffer from high “infant mortality” compared to other regions of the world: Figure 1 shows that the life expectancy of export spells originating from sub-Saharan Africa is about two years (half the level for East Asia and the Pacific), with a median—not shown—around one year. That is, half of the continent’s exporters don’t make it past the first year. Such “hit-and-runs” on international markets cannot establish networks, relationships, and credibility.

Figure 1: Average Spell Survival, by exporting region

Source: Author's calculations, from COMTRADE data

Optimal Financial Structures for Development? Some New Results

Asli Demirgüç-Kunt's picture

One of the interesting debates in the finance and development literature is on financial structures: does the mix of institutions and markets that make up the financial system have any impact on the development process? Last week we hosted an interesting conference on the topic at the World Bank (click here for the agenda and papers). Those of you who have been following this literature will know this is not the first time this topic has been discussed – we held a conference on financial structures over ten years ago.

What do financial structures look like? How do they evolve with economic development? What are the determinants and impact of financial structures? Years ago Ross Levine and I, along with many others, tried to answer these questions and saw clear patterns in the data. One stylized fact: Financial systems become more complex as countries become richer with both banks and markets getting larger, more active, and more efficient. But comparatively speaking, the structure becomes more market-based in higher-income countries. We also saw that countries did not get to B from A in a single, identical path. You didn’t have any market-based financial structures in the lowest-income countries, but as soon as you got to lower-middle income, financial structures became very diverse: Costa Rica was bank-based, whereas Jamaica was much more market-based; Jordan was bank-based, Turkey was market-based etc. etc. So countries were all over the place and the correlation between GDP per capita and financial structure was less than 30 percent.

Cross-border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies

Thorsten Beck's picture

Understanding the role of banks in cross-border finance has become an urgent priority. The recent Global Financial Crisis and ongoing European crisis have shown the importance of creating the necessary regulatory and macroeconomic conditions for a Single European Banking Market to function properly in good and in tough times. Together with five other economists (Franklin Allen, Elena Carletti, Philip Lane, Dirk Schoenmaker and Wolf Wagner) I have  published a CEPR policy report that analyzes key aspects of cross-border banking and derives policy recommendations from a European perspective. We argue that for Europe to reap the important diversification and efficiency benefits from cross-border banking, while reducing the risks stemming from large cross-border banks, reforms in micro- and macro-prudential regulation and macroeconomic policies are needed.

The benefits and risks of cross-border banking have been extensively analyzed and discussed by researchers and policy makers alike. The main stability benefits stem from diversification gains; in spite of the Spanish housing crisis, Spain’s  large banks remain relatively solid, given the profitability of their Latin American subsidiaries. Similarly, foreign banks can help reduce funding risks for domestic firms if domestic banks run into problems. However, the costs might outweigh the diversification benefits if outward or inward bank investment is too concentrated. Based on several new metrics, we find that the structure of the large banking centers in the EU tends to be well balanced. However, problems are identified for the Central and Eastern European countries which are highly dependent on a few West European banks, and the Nordic and Baltic region which are relatively interwoven without much diversification. At the system-level, we find that the EU,  in contrast to other regions, is poorly diversified and is overexposed to the United States.

Generating Jobs in Developing Countries: A Big Role for Small Firms

Asli Demirgüç-Kunt's picture

These days, job creation is a top priority for policymakers. What role do small and medium enterprises (SMEs) play in employment generation and economic recovery? Multi-billion dollar aid portfolios across countries are directed at fostering the growth of SMEs. However, there is little systematic research or data informing the various policies in support of SMEs, especially in developing countries. Moreover, the empirical evidence on the firm-size growth relationship has been mixed. Recent work of Haltiwanger, Jarmin, and Miranda (2010) in the U.S., suggests that (1) Startups and surviving young businesses are critical for job creation and contribute disproportionately to net growth and (2) There is no systematic relationship between firm size and growth after controlling for firm age. It is not clear whether these findings apply in developing countries where there are greater barriers to entrepreneurship, and where venture capital markets that finance young firms are not as well developed as in the US.

In a recent paper Meghana Ayyagari, Vojislav Maksimovic and I put together a database that presents consistent and comparable information on the contribution of SMEs and young firms to total employment, job creation, and growth across 99 developing economies. Our sample consists of 47,745 firms surveyed in the period 2006-2010. We then examine the relationship between firm size, age, employment, and productivity growth and how this varies with country income and find the following:

Should It Be our Business to Promote Business Training?

Bilal Zia's picture

Firms in developing countries face many constraints, from lack of access to finance and physical capital to poor infrastructure. Recently, however, there has been a growing focus among researchers on “managerial capital”, or business skills, as an important determinant of entrepreneurship in developing countries. Policymakers have been equally interested in the perceived deficit of managerial capital, and have been pouring resources into financial and business literacy education programs around the world (see my earlier post on The Fad of Financial Literacy?).

Yet we still have a very incomplete understanding of the effectiveness of these programs, and their specific impact on business outcomes. Until recently, there were only two completed randomized impact evaluations of business training programs in developing countries: one in Peru for rural women, which found positive effects on certain business practices but not on profits (Karlan and Valdivia, 2010), and the other in the Dominican Republic, which found that basic rules-of-thumb-based training had a greater effect on business outcomes than formal business training (Drexler, Fischer, and Schoar, 2010).

Does Competition Make Banking More Dangerous?

Thorsten Beck's picture

Post-Debate Update:

The debate is over, opening statements, rebuttals and closing remarks have attracted lots of comments and the votes been cast and counted. The results show that a (probably not very representative) majority do not think that competition is dangerous for stability, though the reasons for this might vary quite a lot. Some might have been swayed by my argument that it is regulation that makes banking more dangerous – if of the wrong kind. This is also consistent with Ross Levine’s view that the recent crisis "represents the unwillingness of the policy apparatus to adapt to a dynamic, innovating financial system." Understanding the links between competition, regulatory policies and stability is certainly a topic that deserves to be to be explored more – stay tuned for an update over the summer.

Original Post:

What's at the Top of the Agenda for the Financial Sector after the Crisis?

Maria Soledad Martinez Peria's picture

The 2011 Overview Course of Financial Sector Issues took place earlier this month at the World Bank's headquarters in Washington, DC. This annual event is sponsored by the Office of the Chief Economist of Finance and Private Sector Development, and it provides an overview of issues of current importance for policy-makers, researchers, and practitioners working in the financial sector. Speakers included a number of well-known thinkers and researchers on financial sector issues such as Simon Johnson, Ross Levine, and Franklin Allen, and attracted some 70 external participants from central banks, ministries of finance, and bank regulatory agencies representing 45 countries.

The theme of the course this year was Financial Sector Practices and Policies after the 2007-2008 Crisis (view the full agenda). Lectures, case studies, and panel discussions covered a broad spectrum of issues surrounding this theme, such as long-run policy lessons from the financial crisis, the role of the government in the financial sector after the crisis, bank risk management models before and after the crisis, bank resolution mechanisms, building crisis management capabilities, the future of bank regulation, macro-prudential regulation and stress testing banking systems, capital markets and pension systems after the crisis, to mention the main ones. Also, the course looked into longer-term issues related to the development of the financial sector, e.g. remittances, financial inclusion, SME finance, and microfinance.

Worrying Too Much about Brain Drain?

David McKenzie's picture

Brain drain worries policymakers around the world. For example, a search today in Google News gives a host of stories in the past month alone concerning efforts by universities in Vietnam to stop brain drain, demands for wage increases to stop the brain drain of doctors in Pakistan, claims that Malaysia’s brain drain hinders its economic progress, efforts to stem brain drain in Jamaica, a plea to “stop the brain drain” in Cyprus, and even fears of massive brain drain from the state of New York.

But does high-skilled emigration really pose such a threat? The last five years has seen a surge in empirical research on the subject, which John Gibson and I use to answer eight key questions about brain drain in a paper forthcoming in the Journal of Economic Perspectives and now out in the World Bank working paper series.

The 8 key questions addressed are: 1) What is brain drain? 2) Why should economists care about it? 3) Is brain drain increasing? 4) Is there a positive relationship between skilled and unskilled migration? 5) What makes brain drain more likely? 6) Does brain gain exist? 7) Do high-skilled workers remit, invest, and share knowledge back home? and 8) What do we know about the fiscal and production externalities of brain drain?

Global Financial Development Report 2013: Rethinking the Role of Government in Finance

Martin Cihak's picture

My previous blog post introduced the Global Financial Development Report (GFDR), a new series of publications by the World Bank Group. Each of these GFDRs will feature a financial sector topic that is prominent on the international agenda. In the first edition, slated for release in September 2012, we’ll be focusing on one of the most pressing issues faced by policymakers in the wake of the global financial crisis: Rethinking the Role of Government in Finance.

In the decades preceding the global financial crisis, we have seen a steady push towards lowering the role of government in finance. On balance, empirical studies on the topic have been pointing out the harmful effects of government interventions. Policymakers had absorbed these ideas, and we saw that the market shares of state-owned financial institutions have been on the decline in the runup to the crisis. We also saw a broader trend towards reducing the role of government regulation and leaving more scope for market discipline.

The crisis has disrupted this trend, and revived the notion that government, through more stringent regulations and other interventions (including possibly direct ownership of financial institutions) can help maintain stability, drive growth, and create jobs. Is this rethinking warranted? Are market failures more severe than government failures? This topic is highly relevant for the post-crisis policy debates, and it is likely to remain so in the coming years.

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