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Financial Sector

Same All About Finance Blog, New Blog Platform

Ryan Hahn's picture

Readers of the All About Finance blog may have noticed a change in our format over the weekend. That's because we have moved to the platform that supports the World Bank Group's family of blogs, located at http://blogs.worldbank.org. We'll share a common face with the Bank's many blogs, but continue to bring you the same content from Asli and colleagues.

Can the Business Environment Explain International Differences in Entrepreneurial Finance?

Leora Klapper's picture

It is well established that financial development is necessary for the efficient allocation of capital and firm growth, yet firm-level surveys have repeatedly found access to finance to be among the biggest hurdles to starting and growing a new business. For instance, in the World Bank’s Enterprise Surveys standardized dataset for 2006-2009, 31% of firm owners around the world report access to finance as a major constraint to current operations of the firm, while this figure is 40% for firms under three years of age.

In a recent paper with Larry Chavis and Inessa Love we address two types of questions: (1) What is the relationship between firm age and sources of external financing? and (2) Is there a differential impact of the business environment on access to financing by young versus old firms? 

To summarize, we find systematic differences in the use of different financing sources for new and older firms. We find that in all countries younger firms rely less on bank financing and more on informal financing. However, we also find that young firms have relatively better access to bank finance in countries with stronger rule of law and better credit information and that the reliance of young firms on informal finance decreases with the availability of credit information.

Policies for Growth E-learning Course - Apply by September 17, 2010

Ihssane Loudiyi's picture

What? E-learning course on
Policies for Growth
When? October 1-31, 2010
How to Apply? Please follow this link
 

Tentative Agenda
 

The story of growth and poverty reduction is much debated in an ever-changing world. The challenge in the 1960s was how to lift low-income countries from a low-growth trap to a reasonably high-growth path. Fifty years later we have many fast-growing emerging economies but also over a hundred countries unable to move away from low-growth and high-poverty traps.

Between 1960 and 2010, 3 major shifts impacted how we think about growth and poverty. These big shifts were from state-directed ‘commanding heights’ to market-driven approach, from structural issues of deregulation, liberalization and privatization to sectoral sources of growth, particularly agriculture and financial services, and from macroeconomic to microeconomic (and now macro-micro) approaches to growth. Somewhere along these shifts, there was a recognition that poverty reduction is a goal in itself and does not have to depend on how fast or slow a country is growing. The new wave of globalization that has swept the world during the past two decades has aided growth and poverty reduction in the developing world but the ongoing global economic crisis threatens to undo all those gains and much more.

For policy makers, practitioners and students who want to learn more about growth and poverty reduction in development economics today, the World Bank Institute is offering an e-learning course on Policies for Growth

The application deadline is September 17, 2010. Please note that a nominal fee of $250 will be assessed for accepted participants.

Reforming Bank Regulations

Asli Demirgüç-Kunt's picture

It is no surprise that the recent financial crisis has sparked a new round of regulatory reform all around the world. The crisis has certainly exposed significant weaknesses in the regulatory and supervisory framework and led to a debate about the role these weaknesses may have played in causing and propagating the crisis. As a result, reform of regulation and supervision is a top priority for policymakers, and many countries are working to upgrade their frameworks. But there are more questions than answers: What constitutes good regulation and supervision? Which elements are most important for ensuring bank soundness?  What should the reforms focus on?

The Basel Committee – a forum for bank supervisors from around the world – has been trying to answer these questions since 1997. The Committee first got together that year to issue the Core Principles for Effective Bank Supervision (BCPs), a document summarizing best practices in the field. Since then many countries have endorsed the BCPs and have undertaken to comply with them, making them an almost universal standard for bank regulation. Since 1999, the IMF and the World Bank have conducted evaluations of countries’ compliance with these principles, mainly within their joint Financial Sector Assessment Program (FSAP). Hence the international community has made significant investments in developing these principles, encouraging their wide-spread adoption, and assessing progress with their compliance.

In light of the recent crisis and the resulting skepticism about the effectiveness of existing approaches to regulation and supervision, it is natural to ask if compliance with this global standard of good regulation is associated with bank soundness. This is what I have tried to do with Enrica Detragiache and Thierry Tressel, two of my colleagues from the Fund. Specifically, we test whether better compliance with BCPs is associated with safer banks. We also look at whether compliance with different elements of the BCP framework is more closely associated with bank soundness to identify if there are specific areas that would help prioritize reform efforts to improve supervision.

Fiscal Stimulus: Too Little or Ineffective? What Next?

Raj Nallari's picture

All over the world, countries have put in place fiscal stimulus packages as a response to the global crisis. In the US and UK, despite the large fiscal stimuli, the economies are stalling and unemployment rates are still high. Now, Paul Krugman is advocating a second $800+ billion stimulus as he is worried of a Third Depression (i.e. 1873-4, 1929-30 and now) or at best a low job creation and low GDP growth for the short to medium term.

Re-thinking Trade Models - Why did Trade Collapse During this Crisis?

Raj Nallari's picture

Seventy percent of all trade is trade in goods. World trade volume declined by over 20% from peak levels trough April 2008 to January 2009, and this decline was observed across the board – advanced economies recorded a decline of over 23%, Asia about 25%, and so on. Several explanations were provided. One was that countries were raising tariffs and nontariff measures to protect domestic industries during the global downturn.

The Next Wave of This Crisis

Raj Nallari's picture

After all is said and done, this crisis had its genesis in US and European countries living beyond their means. This was reflected in large current account deficit which was financed by emerging economies of China, Russia, Brazil, Korea and others.

A Better Way to Benchmark Financial Sector Development

Erik Feyen's picture

 I. The problem of comparing apples and oranges

Comparison of countries lies at the heart of assessing financial sector performance. In doing so, analysts often simply compare financial sector indicators such as credit to the private sector as a percentage of GDP for a given country to a regional average or a set of "representative" countries.

However, such comparisons are only accurate to the extent that the selected benchmark is appropriate. In practice, countries often differ substantially in terms of structural factors that affect financial development. Thus, a simple comparison can lead to inaccurate conclusions.

Figure 1 below displays a simplified example that demonstrates the core of the issue. It shows dots that represent countries with different “structural factors” (e.g. population density) plotted against their “financial development”, i.e. the extent to which the financial sector fosters economic growth via better risk sharing and more productive investments. The figure shows that in terms of financial development, Country B is better than Country A in an absolute sense.

Prospects for Recovery in Eastern Europe

Ryan Hahn's picture

According to a new paper by World Bank economists Paulo Correa and Mariana Iootty, the recovery won't look pretty. The financial crisis and concomitant global economic crisis have had a disproportionately harsh impact on young and innovative firms in Eastern Europe, and this does not bode well for future growth prospects.

A few weeks ago, our corner of the World Bank hosted an event where Correa and Iootty presented their findings. (This was the first in a new series called FPD Academy that will highlight excellent new analytical work on financial and private sector development.) Video of the event appears below the jump. The presentation itself starts at 4:30 and runs to 27:30. A discussant provides remarks immediately after the presentation, and a Q&A follows. 

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.


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