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.