Will any government be brave enough to let a big bank fail? (Credit: Ian Kennedy, Flickr Creative Commons)
Five frightening years after the meltdown of the global financial system – with the world’s advanced economies stuck in a painful slump – policymakers are still struggling to reinvigorate job growth. If the unemployed were awaiting some tangible initiative from this summer’s G8 summit, they were surely disappointed: Last week’s G8 summit communiqué offered only boilerplate assertions that “decisive action is needed to nurture a sustainable recovery and restore the resilience of the global economy.”
The financial fiasco of 2008 left human wreckage in its wake. An additional 120 million people worldwide were plunged into poverty at the nadir of the crisis, wiping out years of development progress. According to the World Bank's most recent World Development Report, there are now about 200 million unemployed worldwide; 1.5 billion only marginally employed in tenuous jobs; and 2 billion dropouts from the workforce.
The financial crises has entered a new, difficult phase (Credit:©iStockphoto.com/Photomorphic)
The Thirteenth Annual Financial Sector World Bank/Federal Reserve/International Monetary Fund Seminar on Policy Challenges for the Financial Sector was held on June 5 to 7th, attracting more than 90 participants from over 60 countries. There were many distinguished speakers, including World Bank President Jim Yong Kim, IMF Managing Director Christine Lagarde and Federal Reserve Chairman Ben Bernanke. One of the highlights was a provocative lunchtime address on The Contradictions of System Stability: One Asian View by Andrew Sheng, the President of the Fung Global Institute.
Sovereign difficulties have divided financial markets in the Euro area, thereby increasing differences in bank lending rates across countries. Policy makers in both Brussels and Frankfurt are concerned about an uneven transmission of policy interest rate cuts by the European Central Bank (ECB) to bank lending rates across the region.
Based on this situation, a key question stands out: is the link between official, market, and retail interest rates broken?
When markets are functioning properly, interest rates on loans follow the policy rate in a uniform way across countries (granted with some lag). But, in the context of the ongoing crisis, markets became somewhat irresponsive – resulting in ECB rate cuts being unevenly passed on to borrowers across Euro-area countries. This uneven distribution has meant that those countries facing greater financial difficulties had to endure tougher financing conditions than those facing fewer difficulties – as exemplified when comparing Spanish and Italian retail rates to the much-lower French and German ones.
So far, the economic literature has been relatively robust in arguing that government bond yields or credit default swaps (CDSs), given their stability, do not exert much influence on the way banks set their interest rates for their clients. However, the crisis has shown that because of the interconnectedness of central bank and sovereign balance sheets, developments in sovereign markets affect retail interest rates.
How has this played out in the EU11 countries? Have retail interest rate decreased in those countries where central banks reduced their policy rates? Or, was this a reaction on downward movement of CDSs?
Figure 1. Interest rates on new lending to enterprises (in Percent) and CDS spreads (in basis points) in selected EU11 countries
Just six months ago, in the previous South East Europe Regular Economic Report (SEE RER) covering the six Western Balkan countries of Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia (SEE6), we looked at the double-dip recession in this region, and structural policies needed for recovery.
Now, we are happy to report that recovery is, indeed, under way in each of these countries. In 2013, the SEE6 region is projected to grow 1.7 percent, thus ending the double-dip recession of 2012. Electricity, agriculture, and even some exports are helping with this rebound of output. Kosovo is leading the pack with a growth rate of 3.1 percent, with Serbia (which accounts for nearly half of the region’s GDP) expected to grow by 2 percent on the heels of increased FDI, exports, and a return to normal agricultural crops. (In 2012, by contrast, agricultural output in Serbia dropped 20 percent on account of a severe drought). Albania, FYR Macedonia, and Montenegro are all expected to grow by between 1.2-1.6 percent. Rounding out this group is Bosnia and Herzegovina – with expected growth of 0.5 percent.
So, are things finally looking up in the Balkans? Not exactly.
Figure 1: SEE6 Unemployment Rates, 2012
Source: LFS data and ILO. Kosovo’s tentative data suggest unemployment as high as 35 percent.
Is the World Bank working with Non-Governmental Organizations to address high rates of unemployment in Tunisia? I remember this question clearly. It was asked by an NGO advocate during a recent workshop on public works in the Tunisian capital, Tunis. The World Bank team I was with had just finished highlighting the importance of developing public private partnerships for the delivery of employment services when the question was posed.
Launching a sustainable business goes well beyond learning how to draft a business plan or fill out a financing application. It involves a range of skills, both “hard” and “soft”, such as managing a start-up enterprise, motivating employees, assembling a cohesive team, tailoring a product to a well-defined market, adapting rapidly to fast-changing circumstances and consumer sentiment, and understanding how to convert an interesting technology into a viable business.
Does everyone need financial education? (Credit: Bill Ruhsam, Flickr)
I am not at all sure I could live on a few dollars a day. Why would I think that those who do need financial education? Yet in any meeting or conference on financial inclusion, someone will clamor for financially educating the poor and all will readily nod. Please allow me to side-step the substance of the issue, for I have no new empirical evidence to bring to the table either way. What I find curious is why the idea that poor people are lacking essential financial literacy skills is so prevalent among the non-poor. Let me propose five reasons.
1. The poor mis-spend
Who hasn’t wondered why it is you can find Coke bottles in the poorest communities in developing countries? Who hasn’t had a pang of doubt upon seeing reams of shiny bags of candy hanging from the shabbiest stalls in the remotest villages? And you’re thinking: my parents didn’t buy me this stuff! Well, it might be because your parents had plenty of other ways to reward you and each other. Think toys, ski trips, family outing to a restaurant, gifts, etc. Next to these things, splurging one day on some candy and a Coke seems downright meaningless. But for many it might be the easiest way to create magical family moments, to transcend a dreary daily routine. If it helps keep the family going and united, it might be a bargain. We musn’t pass judgment on how the poor spend their money, for we cannot imagine the job that they are ‘hiring’ those seemingly superfluous products to fulfill.
Consider an image: hubs and spokes sprawling across a map. At the Bank, we work in many fields that could be portrayed this way – finance, trade, transportation, infrastructure or urban and regional development. The position of a country, a city or a bank in its network is vital to explaining its individual economic performance. The property of the network as a whole is also important to understanding the resilience of the system and its parts to shocks or contagion effects.
In May, the Bank’s Trade Department and the IMF’s research department brought together, for the first time, a group of experts on various types of networks. The objective was to find out what the "science of networks" can tell us about the practice of international and development economics. The group included network planners from the private sectors, regulators, economists and physicists.
With investments in infrastructure and efforts to improve the business climate, Algeria is focused on creating the conditions for more robust and inclusive growth.
Islamic finance can connect millions around the globe to the economy (Credit: The Reboot, Flickr)
In the wake of the global financial and economic crisis, the need for a new development model which is more sustainable and also fosters inclusive growth has become more apparent. Could Islamic finance be the answer? Islamic finance promotes risk-sharing, connection to the real economy and emphasizes financial inclusion and social welfare. Can these dimensions contribute to inclusive growth and sustainable development?
Islamic finance is based on two intrinsic features: risk-sharing and the link between financial transactions and the real economy. Because all financial contracts are backed by real sector assets and risk-sharing among partners, including financing institutions, Islamic financial instruments have relatively more stability than conventional instruments and tend to be more flexible against unanticipated shocks. This critical link brings prudence to the system, promotes equity relative to debt, broadens financial participation, and minimizes overall vulnerability.