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Financial Sector

Subsidies, loss aversion, and lessons from Iran

Caroline Freund's picture
One week after extensive protests and strikes against the government’s removal of fuel subsidies, the Nigerian government responded by rolling back prices.  The cost of gasoline had doubled since New Year's Day, and this week’s reversal leaves prices elevated by just one third. Most Nigerians view the subsidy as the main benefit from the country's oil wealth. Though implementation was faulty in this case, there is a strong economic rationale for subsidy removal that goes well beyond their high budgetary cost.  Subsidies distort prices and hence, too much of the subsidized good is used by consumers and producers because it is relatively cheap.

Alice in Euroland: What next for Europe’s rapidly shrinking banks?

Inci Otker-Robe's picture

Less than six years ago, policymakers were concerned about a credit boom in central and eastern Europe (see, e.g., Enoch and Otker-Robe, 2007). Now, as the Eurozone debt crisis has taken center stage and bank deleveraging has picked up speed, they worry about a massive credit crunch across Europe, with potentially damaging spillover effects around the world.

How did we get here? How big is the problem? And what is the way forward?

The 2008-09 Crisis: From credit crescendo…

A combination of complex global and domestic factors including structural global imbalances, incentives supported by economic policies and implicit government or supra-national guarantees, and industry practices allowed massive amounts of easy credit to flow from domestic and international sources to doubtful parts of the private sector such as risky mortgages and real estate projects, triggering unsustainable credit booms and asset bubbles across the world. (Much has been written on the topic. See, for example, Brunnermeier 2009, or Obstfeld and Rogoff 2009).

Emerging signs of structural transformation in Tanzania

Jacques Morisset's picture

"How was school today and please don’t forget to bring milk on your way back home". This simple conversation between Halima, a 36–year-old woman from Dodoma and her young daughter on their mobile phones was almost impossible 15 years ago: only 2 percent of Tanzanians had a phone and only one of two children attended a primary school (Figures). Today those figures reach 50 and almost 100 percent respectively. Daily life has evolved in Tanzania with technology and education as the main drivers.

Unemployment: The Mediterranean effect

Caroline Freund's picture
High unemployment rates in the Middle East and North Africa (MENA) are well known. What is less well known is that high unemployment characterizes all Mediterranean countries. Using the most recent data in the World Development Indicators, countries with coastlines on the Mediterranean have an average unemployment rate of 12.5%. Average unemployment among the European Mediterranean countries is 13.5% percent (of which, France, Italy, Greece, and Spain average 11%), while unemployment in the MENA Mediterranean averages 10.5%.  

Triggering Disruptive Innovation in Retail Banking in the Digital Age

Ignacio Mas's picture

See what a profound transformation the internet is producing in information-based sectors. Newspapers are under threat from online news sources and blogs. These same web destinations are becoming less relevant as people simply lift and filter the information they want using RSS feeds. The music CD is being unbundled as customers buy individual tracks online. These songs get remixed and re-distributed across an ever-growing number of online content repositories. Books are increasingly digitized, and customers can now sample content and search for information across entire libraries.

The internet is a destroyer of digital products but a great creator of new kinds of customer experiences. Power has shifted to users: it’s no longer about the packages of content suppliers want to sell but about the content mash-ups users want to consume. Providers’ best response is to try to extract more customer information with each interaction, and use that to deliver even more relevance and convenience to their customers. Think Google and Apple and Amazon: the new corporate battlefield lies in the control of the user interface and the customer intelligence system that supports it.

Yet there is one information-based sector that seems deaf to the great sucking sound of the internet: banking. What is banking but managing information of who has what financial claims on whom? For banking, the internet truly is still just another channel. Sure, it has added transactional convenience, but has it changed how banks talk to us?

What Do We Know about the Impact of Tax Reforms on Private Sector Development?

Miriam Bruhn's picture

I recently conducted a literature review on the impact of tax reforms on private sector development as part of the Investment Climate Impact Project.1 My goal was to take stock of what is currently known about the impact of reforms that the World Bank is supporting in this area and to identify the gaps in knowledge that we ought to fill by conducting more impact evaluations. While tax reforms can have a broad range of effects in the economy, the focus here was on private sector outcomes only, as measured by investment, tax evasion by formal firms, formal firm creation, and firms’ economic performance.

It turns out that most papers in this area study the impact of changing tax rates. Both cross-country and micro-level  studies suggest that lowering tax rates can increase investment, reduce tax evasion, promote formal firm creation and ultimately lead to an increase in firms’ sales and GDP growth overall. However, lowering tax rates also has important implications for government revenue and it is thus often difficult to balance the trade-offs between various goals of public policy.

Recovering with jobs in the Middle East & North Africa

Bob Rijkers's picture
What policies can help mitigate the impact of financial crises  on employment? In an ambitious paper presented at the World Bank seminar series of the Chief Economist of the Middle East and Northern Africa Region, IMF colleagues Davide Furceri, Dominique Guillaume and Lorenzo Bernal-Verdugo provide a partial answer to what is arguably one of the most pressing questions confronting policymakers across the globe today.

Social entrepreneurship in Egypt: challenges and opportunities

Myra Valenzuela's picture
High rates of youth unemployment across the Middle East and North Africa were a major catalyst for the Arab Spring revolutions. To help address this pressing issue, the Development Marketplace (DM) is preparing for a country-level competition in Egypt early next year. The proposed DM competition will focus on social entrepreneurs with projects that have a strong impact on creating sustainable job opportunities, especially for low-income and marginalized groups. The main focus of the Egypt DM will be on supporting projects in the agricultural supply chain sector.

Should Development Organizations be Hunting Gazelles?

David McKenzie's picture

Last week I presented some early findings from ongoing work at the IADB, at Innovations for Poverty Action’s SME initiative inaugural conference. There was a lot of interesting discussion about early results from efforts to improve management and skills in small and medium firms, discussion of the most appropriate ways of financing these firms and the extent to which a personal vs automated approach to determining creditworthiness can be used, and an interesting panel on policies towards the missing middle. However, the one theme that has got me thinking the most is something that seems to come up a lot in discussions of microenterprise development and SME programs recently, namely should development institutions and policymakers be directing fewer resources at microfirms and more at high-growth-potential enterprises or gazelles?

Gazelles are defined by the OECD to be all enterprises up to 5 years old with average annualised growth greater than 20% per annum, over a three year period, and which have 10 or more workers. Recent work in the US, and looking at firms around the world have emphasized the role of a subset of dynamic, fast-growing young firms in net job creation, leading to policymakers and practioners focused on job creation to think we should be devoting more effort to identifying and supporting these gazelles, and decrying the lack of venture capital markets in developing countries. For example, see this scoping note by Tom Gibson and Hugh Stevenson at the IFC.

Informal Networks and Shadow Banking: Policy Implications

Robert Townsend's picture

Panel data can be used to measure directly or infer indirectly the presence and role of informal financial networks. In the Townsend Thai data (a collection of over 12 years of annual panel data for 900 households in 64 Thai) villages, networks are shown to play a beneficial role in smoothing consumption and investment against income and cash flow fluctuations. Villagers who lack formal financial access but are indirectly connected through networks receive the benefits of the formal financial system. Surveys of financial access  that ignore these networks can understate the reach of financial access while hiding the needs of the truly vulnerable (e.g., poor households without any kin in their village). Complementarities between the formal financial system and informal networks show up in bridge loans for repayment and the transactions demand for cash, revealing highly active informal money markets.

The same logic and data make labor supply and hours data conform with those of a sophisticated risk syndicate and make the rate of returns on investment/occupations conform with the theory of modern finance—in particular a capital asset pricing model applied to technologies/occupations with common market/village risk. We found that families engaged in occupations like rice farming require a higher expected return because this activity does well only when the village as a whole is doing well, and conversely occupations which are not covariate with market risk are recognized as particularly valuable. However, heterogeneous risk preferences creates a policy warning: outside insurance targeting village/market risk can actually make some in a village worse off, those had been providing insurance to others.