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Deals vs. Rules: Capturing Regulatory Burdens

Mary Hallward-Driemeier's picture

The costs of excessive regulatory burdens can stifle incentives for firms to innovate, invest and grow. In recent years, aid agencies and developing countries have been stepping up efforts  to reduce numerous and lengthy regulatory procedures. However, the focus on aggregate measures of regulatory burden for a country and relying on measures of formal requirements misses a lot of the action.

The World Bank has interviewed over 100,000 entrepreneurs and senior managers in over 100 countries as part of its Enterprise Surveys project. Among the measures collected is the de facto time it takes businesses to complete various interactions with the government (e.g., the time to get goods through customs, get a construction permit, or get an operating license). In the chart below, each vertical line represents a country, and the length of the line represents the distribution of time for firms to clear goods through customs. The first thing to notice is just how much variation there is – within individual countries. There are favored firms for whom it takes a couple of days to obtain permits or clear customs – and disfavored firms, for whom the wait can be weeks or even months. The variation within most countries is considerably larger than the differences in averages across countries.

Job Creation and the Global Financial Crisis

David McKenzie's picture

Each new jobs report in the U.S. reignites the debate about whether the government is succeeding in stemming job losses and doing enough to help stimulate the creation of new jobs.

The U.S. has been far from alone in pursuing active labor market policies during the crisis. In a new note, David Robalino and I take stock of what labor market interventions countries have put in place during the recent crisis and summarize what we know about their effectiveness to date, as well as discuss the emerging issues countries are facing as they adapt these policies to a recovery period.

What Will Economic Recovery Look Like in Eastern Europe?

Paulo Correa's picture

Editor's Note: The following post was contributed by Paulo Correa, Lead Economist for Private Sector Development in the Europe and Central Asia Region of the World Bank.

International debate on the financial crisis has shifted attention to the potential drivers of the future economic recovery. The countries of Eastern Europe were hit hard by the global financial crisis, after having long enjoyed abundant international financing and large inflows of foreign direct investment that brought them high rates of growth, mainly through the expansion of domestic consumption. With the slowing of international trade and the indefinite tightening of financial conditions, sustained economic recovery will depend to a greater extent on productivity gains and growth in exports. 

Two important sources of expansion in firms’ productivity are learning and R&D. Economic research tells us that, depending on size and survival rate, younger firms tend to grow faster than older firms. Because the learning process presents diminishing returns, younger firms, which are in the early phases of learning, will learn faster and thus achieve higher productivity gains than older firms. Innovative firms are expected to grow faster too – R&D tends to enhance firm-productivity, while innovation leads to better sales performance and a higher likelihood of exporting.

The Pitfalls of Financial Regulatory Reform

Ryan Hahn's picture

On May 25 we invited Professor Charles Calomiris of Columbia University to come speak at the World Bank as part of our FPD Chief Economist Talk series. Professor Calomiris discussed the on-going process of regulatory reform, particularly in the U.S., and was, to put it mildly, less than sanguine about the legislation that is currently making its way through the U.S. Congress. Watch a video of his talk (below the jump). The talk itself runs about 46 minutes, and a Q&A session follows.

Impact Assessment Meets the Market

David McKenzie's picture

Rigorous impact evaluations are one of the most important tools we have for understanding “what works” in development. Impact evaluations compare the outcomes of a program or policy against an explicit counterfactual of what would have happened without the program or policy. This kind of evaluation has been gaining more recognition recently, particularly since Esther Duflo, a professor at MIT and a pioneer in this field, received the prestigious John Bates Clark Award. But her work and that of others in the field has focused primarily on health and education. That is starting to change, with finance and private sector development finally getting their due.

In a recent overview paper, I examine why impact evaluations have been slow to occur in the areas of finance and private sector development, and provide examples of successful cases where it has occurred. I suggest key barriers to their use, including (1) a lack of experience with these methods by operational staff working in these fields; and (2) a perception that many of the policies being implemented are not amenable to evaluation.

Bank Competition and Access to Finance

Asli Demirgüç-Kunt's picture

In a recent blog post, I talked about whether there are trade-offs between bank competition and financial stability.  But what about access to finance?  What does competition imply for access?

Theory supplies conflicting predictions, as usual.  According to standard economic theory, a banking system characterized by market power delivers a lower supply of funds to firms at higher cost; hence greater competition improves access.  However, several theoretical contributions have shown that when we take into account problems of information asymmetry, this relationship may not hold.  For example, banks with greater market power can have more of an incentive to establish long-term relationships with young firms and extend financing since the banks can share in future profits.  In competitive banking markets, however, borrower-specific information may become more dispersed and loan screening less effective, leading to higher interest rates. Indeed, while it has been shown that concentration may reduce the total amount of loanable funds, it may also increase the incentives to screen borrowers, thereby increasing the efficiency of lending.  However, all these models also assume a developed economy, with a high degree of enforcement of contracts and developed institutional environments in general. This is obviously not the case for most of the countries where the Bank works.

Bank Concentration, Competition and Financial Stability: What Are the Trade-offs?

Asli Demirgüç-Kunt's picture

Competition in the financial sector has a long list of obvious benefits: greater efficiency in the production of financial services, higher quality financial products, and more innovation.  When financial systems become more open and contestable, we generally see greater product differentiation, a lowering of the cost of financial intermediation, and more access to financial services.  But when we turn to the issue of financial stability, it is no longer so obvious whether competition is beneficial or not.  Is there a trade-off between increased competition and financial sector stability?

In one camp, there are some who stress the notion of charter value—the proposition that the financial sector is unlike other sectors of the economy and that too much competition may be harmful because it reduces margins and may foster excessive risk taking.  In a second camp are those who argue that a more concentrated banking system may exacerbate banking fragility.  This view holds that less competition leads to greater concentration and increased market power, with banks charging higher interest rates and obliging firms to assume greater risks.  Those in the second camp might also point to the recent crisis, arguing that if banks become “too big to fail” the implicit guarantees provided to them can distort their risk-taking incentives, leading to significantly higher fragility.

As usual, theory is conflicted, so we must turn to empirical evidence to help sort out these claims. In fact a substantial amount of empirical evidence supports the idea that competition per se is not detrimental to financial stability when adequate institutional frameworks are in place.  For example, using data for 69 developed and developing countries Thorsten Beck, Ross Levine and I study the impact of bank concentration and regulatory environment on a country’s likelihood of suffering a systemic banking crisis.  In short, we find that concentration makes banking systems more stable. At the same time, we find that the more competitive financial systems—those with lower barriers to bank entry, fewer restrictions on bank activities, greater economic freedoms and higher quality of regulations—tend to be more stable.  Hence, concentrated banking systems are not necessarily uncompetitive. 

Bailing Out the Banks: Reconciling Stability and Competition in Europe

Thorsten Beck's picture

The relationship between market structure, competition and stability in banking has been a policy-relevant but controversial one (see Beck, 2008 for a pre-crisis survey).  The current crisis has put the topic back on the front-burner, and particularly so in Europe, where competition concerns about the effect of national bail-out packages on competition across Europe rank high.  Together with four other European economists, I have tackled this question in a recent CEPR report: Bailing out the Banks: Reconciling Stability and Competition.

The crisis has provoked two common but quite different reactions concerning the role of competition policy in the banking sector.  One reaction has been to jump to the conclusion that financial stability should take priority over all other concerns and that therefore the "business as usual" preoccupations of competition regulators should be put on hold.  Another reaction has been to fear that intervention to restore financial stability will lead to massive distortions of competition in the banking sector, and therefore to conclude that competition rules should be applied even more vigorously than usual, with the receipt of State aid being considered presumptive grounds for suspecting the bank in question of anti-competitive behavior.  We endorse neither of these points of view.