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Financial Sector

An Autopsy of the Financial System - The Movie Edition

Ryan Hahn's picture

As promised, here is the video of Professor Ross Levine's presentation at the World Bank on April 28 on the theme of An Autopsy of the Financial System: Suicide, Accident, or Negligent Homicide. For background information on the event, please see Professor Levine's earlier post.

Experts Weigh in on FDI and Political Risk

Michael Strauss's picture

On Wednesday, May 5, 2010, MIGA convened a panel discussion on the state of political risk in the world economy, which proposed to answer the pregnant question: “Are we moving into a riskier world?”  

MIGA Chief Operating Officer, James Bond, moderated a panel that included:

Development Marketplace Winners: On the Path to Replication and Sustainability

Tom Grubisich's picture

Financing is only one key element for achieving sustainability.

What are the critical elements necessary for sustainability and scalability of social enterprise?
 

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. 

The Singaporean Economy: Lessons for Post War Sri Lanka

Chathurika Hettiarachichi's picture

“There was no secret, we had no choice but to take chance and sail into rough waters”- Lee Kuan Yew

Singapore is an inspiration to Sri Lanka and other developing countries in terms of economic development, political stability, and good governance. Since 1967, it has increased its per-capita purchasing power (PPP) 10-fold to $44,600 in 2007, surpassing countries such as Switzerland’s PPP ($37,300) in 2007. Singapore also has high demographic development compared to Sri Lanka even though both countries were about even in 1960s. The President, Lee Kuan Yew, navigated the Singaporean economy after gaining independence in 1965. With a population of over 5 million, Singapore maintains a market driven guided economy with diversity in cabinet and government.

What was their secret to success?

At independence in 1965, the economy was met with unemployment problems, an unskilled workforce, few entrepreneurs, no domestic savings, wretched housing conditions, militant labour unions and racial riots. They devised a strategic economic plan; developing entrepot (commercial) trading, export driven manufacturing, and then creating a service based knowledge economy.

The Optimal Design of Sovereign Wealth Funds

Jamus Lim's picture

Although much of the news flow regarding oil in recent days has focused on the terrible environmental tragedy off the Gulf of Mexico, another oil-related story has occupied the minds of many market analysts: that of rising oil prices, along with the overall increase in the prices of a whole host of commodities, as the global recovery has taken hold.

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. 

Varieties of African successes

Shanta Devarajan's picture

Tolstoy notwithstanding, the 20 African success stories described in the booklet “Yes, Africa Can” show that success comes in many different forms.  Broadly speaking, the cases fall into three categories:

- Success from removing an existing, major distortion.  The best example is Ghana’s cocoa sector, which was destroyed by the hyperinflation and overvalued exchange rate in the early 1980s.  When the exchange rate regime was liberalized and the economy stabilized, cocoa exports boomed (and continue to grow).  Similar examples include Rwanda’s coffee sector and Kenya’s fertilizer use.  Africa’s mobile phone revolution, too, is an example of the government’s stepping out of the way—in this case by deregulating the telecommunications sector—and letting the private sector jump in. 

Making Educational Investments Grow: Lessons Learned from Korea and Mexico

Christine Horansky's picture

Like plants in a garden, investments in education need certain environmental conditions in order to flourish.Investments in education and human capital have long been recognized as precipitators of future economic growth. Rapid development in Korea in the second half of the 20th century, for instance, has been traced by scholars back to high levels of investments in schooling and training, creating the enabling environment for industrialization and further specialization.

There is no doubt that commitment to education for economic development requires both long-term funding and the multiplying effects of time.

But what causes countries with similar levels of sustained spending to achieve vastly different outcomes? It's a question that burns in the minds and wallets of governments and development efforts around the world.


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