Syndicate content

Financial Sector

For success and sustainability, seek broad social ‘well-being’; Good governance promotes a ‘virtuous cycle’ of growth

Christopher Colford's picture

Beyond the cold calculus of GDP and TFP and FDI, development is about promoting strong societies as well as propelling powerful economies. But how can we measure societies’ progress toward success? Some may try to calculate “Gross National Happiness” as a yardstick, and some may envision “getting to Denmark” as the ideal end-of-history destiny of development – but are there patterns that reveal how societies can flourish?

Two recent Washington seminars suggest that – by pursuing innovation and inclusion, and by focusing on broad-scale social “well-being” – policymakers can define realistic paths toward development success.

The methodologies used by Harvard economist Philippe Aghion at an International Monetary Fund forum and by former World Bank strategist Enrique Rueda-Sabater at a Center for Global Development discussion may have been different, but their conclusions were in harmony: Societies thrive – in a sustainable way – when inclusion and innovation help expand the circle of opportunity, and when strong governance standards lead to sound civic decision-making.

Taken together, the two seminars’ insights should help inform policymakers’ debate about the Sustainable Development Goals, which are due to be approved in September at the opening of the United Nations General Assembly.

Aghion, at an IMF seminar (sponsored by its Low-Income Countries Strategy Unit) on June 30, approached the topic of “Making Growth Inclusive” by imagining “how to enhance productivity growth while promoting social mobility.” Presenting data from a recent paper on “Innovation and Top-Income Inequality,” which he recently co-authored with an all-star team of economists, Aghion outlined the way that income and wealth inequality have drastically soared in developed countries since the mid-1970s – analyzing trends that by now are sadly familiar to the squeezed middle class, as calculated in the esteemed work of Thomas Piketty, “Capital in the Twenty-First Century.”

Building on that data, Aghion took the inequality-and-inclusion logic several steps further. He lamented the way that “skill-biased technological change” has (in the absence of policy safeguards) provoked societies to stratify along the lines of wealth, income, education and connections. Yet “creative destruction” is inevitable in “a Schumpeterian world,” reasoned Aghion: A significant factor expanding the wealth gap is the same process of continuous economic renewal that helps economies advance. “There is a big [economic] premium to being a superstar innovator,” he asserted, noting that “you can become rich by innovating” – and thus “innovation is a big part of top-1-percent income inequality.”



Philippe Aghion

“Creative destruction is good for social mobility” and broader inclusion, in the long run, because it causes a steady procession of “new innovators to replace old incumbents.” The effect of each wave of innovation is fleeting, especially in a hyperspeed economy: “You get temporary ‘rents’ when you innovate. You don’t get them forever,” because the relentless Schumpeterian process will eventually cause yesterday’s innovators to become, in turn, tomorrow’s has-beens.

The darker danger of entrenched inequality occurs, said Aghion, when incumbent interests use their political power to lobby for the protection of their advantages – whether by pleading for tax-code favors, seeking government-imposed barriers to the entry of new competitors, or purchasing influence with pliant politicians through campaign donations. (In an aside on U.S. politics, Aghion pointed to his paper’s data linking a state’s representation on the congressional Appropriations Committees with its amount of federal favors – a shrewd quantification of the pork-barrel compulsions of Capitol Hill.)

Because innovation promotes social mobility and thus greater inclusiveness, Aghion contended that “innovation is a good guy; lobbying is a bad guy.” So “if you’re for inclusive growth, then you will be against lobbying and [the creation of] entry barriers.”

Focusing simply on present-day inequality is less informative than focusing on social mobility, he asserted. There’s nothing wrong with an economy that bestows ample financial rewards upon genuine innovators who create new products and processes. There is, however, something deeply wrong – and economically growth-inhibiting – with governments that allow no-longer-innovative incumbents to use their political connections to suppress potential competitors.

The IMF panel’s respondents amplified Aghion’s analysis. World Bank economist Daniel Lederman noted that it would be wise to use “the lexicon of ‘inequality of opportunity’,” because some degree of wealth inequality is inevitable (and perhaps even desirable) when individuals’ talent and effort are rewarded with rising incomes. IMF economist Benedict Clements – deploring the “great degree of disparity in ‘equality of opportunity’ ” that now prevails in advanced economies, including the United States – noted that there need be “no conflict between equity and efficiency if you design your policies right.”

Getting policies right – by upholding strong standards of governance – was also one of the underlying themes at a July 21 seminar at the Center for Global Development led by Rueda-Sabater, who is now a senior advisor to the Boston Consulting Group and a visiting fellow among CGD’s strong lineup of scholars. Rueda-Sabater is well remembered at the World Bank for leading a research team’s detailed “scenario planninganalyses that, in 2009, discerned the contours of three possible scenarios for the world in the year 2020.

Presenting a recent BCG report, “Why Well-Being Should Drive Growth Strategies,” Rueda-Sabater outlined an imaginative BCG diagnostic tool: the “Sustainable Economic Development Assessment” (SEDA), which measures the relative well-being of 149 countries by gauging their success in converting wealth into well-being – that is to say, in effectively translating their potential into tangible progress.


 

Pathway to profitable women-owned enterprises

Francesco Strobbe's picture

Pathway to profitable women-owned enterprises @ Evgeni Zotov / FlickR

Women entrepreneurs in Ethiopia are disadvantaged from the start. They have less access to the finance, networks, and education which help their male counterparts advance. They face regular discrimination and harassment from society--sometimes even from their own families and communities. The challenges a woman entrepreneur in Ethiopia faces in growing her business are overwhelming.

Crowding in Technical and Financial Resources in Support of Forest Landscapes

Paula Caballero's picture
Mexico butterflies by Curt Carnemark / World Bank ​As financing for development talks wrapped up last week in Addis, many conversations revolved around the “how much” as well as on the “how” of achieving universal sustainable and inclusive development in the post 2015 context. Work in the natural resources arena has valuable lessons to offer. 

There is a growing consensus that a new approach is needed to meet the financial needs of developing countries to ensure sustainable, inclusive and resilient growth paths. We all know that Official Development Assistance (ODA) finance is limited and cannot address the massive investment needs of countries. In addition to increased domestic resource mobilization, the more effective engagement of a variety of players, especially from private sector, NGOs, and philanthropic organizations, will be key to close the finance gap. 

Building financial capability in Rwanda

Douglas Randall's picture


Rwanda’s level of financial inclusion is fast increasing, propelled forward by ambitious targets and innovative policy and regulatory approaches. The 2008 and 2012 FinScope surveys showed that financial inclusion had doubled from 21 to 42 percent and the 2015 iteration is expected to show continued progress. But with such a large and rapid movement of adults into the formal financial sector, ensuring that the ‘newly banked’ are able to effectively and responsibly select and use financial products is critical.

From Tirole to the WBG Twin Goals: Scaling up competition policies to reduce poverty and boost shared prosperity

Anabel Gonzalez's picture
The role of policies that ensure and promote competition in the marketplace have moved to the forefront of economics and the development agenda. The Australian G20 presidency highlighted competition as one of the four policy areas for the growth agenda. India’s prime-minister Modi has placed competition on his transformational reform agenda, and The Economist recently emphasized the lack of competition as a source of low productivity among Latin American firms. Jean Tirole, who won the latest Nobel Prize for his analysis of market power and regulation, demonstrated how competition policies can spur powerful firms to become more productive and can give smaller firms more opportunity to thrive.

To respond to client demand at this crucial moment for economic development, the World Bank Group is generating knowledge to better understand the links among competition, growth and shared prosperity, and to develop policies that promote competition. Last week, at a Bank Group event, held jointly with the Organization for Economic Cooperation and Development (OECD), experts and practitioners discussed the growing body of empirical evidence on these matters. Representatives from the WBG’s client countries, in turn, shared how WBG competition policy tools are leveraging their development impact.

Competition in the marketplace matters for economic growth and household welfare for two reasons:
 
  • First, it fosters more productive firms and industries, allowing domestic firms to become more competitive abroad and to export more. A WBG study shows that substantially increasing competition in Tunisia would boost labor productivity growth by 5 percent.
  • Second, it protects poorer households from paying too much for consumer goods, and from missing out on the benefits of trade liberalization. In Mexico, lack of competition costs the poorest households 20 percent more than richest households. In Kenya, poverty could fall by 2 percent if competition was more intense in the maize and sugar markets.


Competition is restricted by businesses practices that undermine competitive dynamics. When firms agree to fix prices, empirical evidence reveals that consumers pay on average 49 percent more, and 80 percent more when cartels are strongest. Developing economies are still frequently marked by regulations that restrict the number of firms or limit private investment; rules that increase business risks and facilitate agreements among competitors; and rules that discriminate against certain competitors or affect competitive neutrality. When new retail firms are allowed to enter the market, real household income increases by 6.2 percent.

'Model Law for Best Practice in Financial Consumer Protection': An important driver for Universal Financial Access

Ros Grady's picture

The Client Protection Principles: Model Law and Commentary for Financial Consumer Protection (the "Model Law"), recently launched by the Microfinance CEO Working Group, has the potential to be a useful resource for the many developing and emerging economies that are seeking to design and implement international best practices in financial consumer protection, having recognized that consumer protection is a critical element in building and maintaining trust in the financial sector and achieving financial inclusion targets.

The Model Law was prepared on a pro-bono basis by the international law firm DLA Piper on the basis of the 7 Client Protection Principles of the Smart Campaign. The project, which took place over a 15-month period and was managed by Accion on behalf of the Council of Microfinance Counsels, included consultations with financial inclusion stakeholders and legal experts, who undertook a review of existing legal frameworks in various countries. Reference was also made to international best practices and principles such as the World Bank’s Good Practices on Financial Consumer Protection and the G20 High Level Principles on Financial Consumer Protection.
 
The Model Law is a high-level, activities-based law that is intended to apply equally to all financial-services providers. This includes “banks, credit unions, microfinance institutions, money lenders and digital financial-service providers.” The apparent aim is to ensure an equal level of protection for all consumers and a level playing field. The consumers concerned may be an individual or a micro-, small or medium-sized business, and so the law will apply equally to consumption and small-business facilities. Many of the provisions are framed in terms of principles, the detail of which would need to be filled out in related legislation.


 
The framework of the Model Law follows the Smart Campaign’s 7 Client Protection Principles, and so it covers the topics of appropriate product design and delivery; prevention of overindebtedness; transparency; responsible pricing; fair and respectful treatment of clients; privacy of client data; and mechanisms for complaint resolution. There is also a section covering the establishment of a dedicated supervisory authority with broad functions relating to the regulation, supervision and registration of financial-services providers, market monitoring and enforcement.

Decision day for Greece?

Thorsten Beck's picture

There have been many days over the past five years characterized as the final decision day, climax in a drawn-out attempt to resolve the Greek debt crisis and lead the country back onto a sustainable growth path. Today’s emergency summit of eurozone’s heads of government seems to be yet another of these days. Will Greece exit the euro or will there be another short-term respite? Are we really in the endgame? In the following, I will argue that whatever outcome, Greece will be on fiscal life support from the European Union for many years to come and that, ultimately, growth can only be restarted in Greece and not with externally imposed adjustment programs.

Olympic opportunity: Renew the ideal of the global Games – by restoring the Olympics to their historic home

Christopher Colford's picture

Wasting billions of dollars, time and time again, to stage self-indulgent sports spectacles is no way for any society to build shared prosperity for the long term. But just try explaining that common-sense economic logic to the sports-crazed cities that keep lining up to purchase a moment of fleeting fame – and that end up squandering vast sums, by building use-once-throw-away “white elephants” for one-off events like the Olympic Games or the World Cup soccer tournament.

The sports-industrial complex continues to beguile the gullible and the grandiose, even though scholars have long warned of the futility of sports-event-driven spending. Beijing spent about $40 billion to host the 2008 Summer Games, and Sochi spent upwards of $50 billion to stage the 2014 Winter Games – while Brazil spent $20 billion to host (and heartbreakingly lose) the final rounds of 2014 World Cup soccer. Not to be outdone for extravagance and excess, Qatar reportedly plans to spend as much as $200 billion for the 2022 festivities.

Like the deluded leaders of declining Rome – who distracted their once-industrious city into passivity by pacifying the populace with what the poet Juvenal derided as panem et circenses: "bread and circuses" – modern-day civic leaders are allowing their obsession with media-moment athletic fame to trample economic logic. The scale of their civic hubris – and the malign self-interest of the construction firms, financiers, flacks and fixers who goad credulous Olympic-wannabe cities into wanton overspending – is insightfully dissected in a valuable new book, “Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup,” by Andrew Zimbalist, a professor of economics at Smith College.

In recent remarks at the World Bank, Zimbalist deplored the reckless rush that stampedes many cities into bleeding their civic coffers in the quest for Olympic notoriety. The saddest example may be the city of Montreal, whose debt from the 1976 Summer Games burdened the sorry city for 30 years.

Yet the suckers keep taking the bait. Boston, said Zimbalist, recently put forth an extravagant multibillion-dollar bid for the 2024 Summer Games – and only later, after the initial headlines and hoopla had abated, did more complete statistics reveal the likely scale of Boston’s folly. And, of course, the Olympic organizers would again stick the long-suffering taxpayers with the bill for any revenue shortfall.

Zimbalist’s logic is a wake-up call for those who somehow imagine that “this time is different” – that one-shot wonders might somehow produce long-term economic benefits. Some occasional exceptions suggest how very rare it is that optimists are rewarded: London, for example, may have gained a much-needed morale boost after its successful 2012 Summer Games, and two (but only two) Olympic festivals actually turned a profit – both of them in Los Angeles, which shrewdly re-used some of its 1936 Olympic facilities when it again played host to the Summer Games in 1984. But for most cities – Montreal in 1976, Sarajevo in 1984Athens in 2004 and many more – the money spent on soon-to-crumble stadia, ski jumps and swimming pools was a diversion from urgent human needs and productive investment.

Zimbalist makes a compelling case – yet beyond the diagnosis of the malady, one seeks a prescription to cure it. Can such Olympic megalomania be tamed? Are there other ways to build, and pay for, worthy sports facilities that honor the spirit of the Olympic Games while avoiding the overspending that bleeds their hosts dry?

A potential solution arose amid Zimbalist’s recent World Bank discussion. Rather than build one-shot Olympic facilities that are destined to be discarded as soon as each extravaganza is finished, why not build just one enduring set of permanent Olympic facilities that can be refurbished and re-used, year after year? Build it right, and build it only once: That way, the cost of building and maintaining an Olympic complex could be spread over generations.

Pursuing that solution seems especially timely right now, and here's why. Where is the historically logical place to locate such a permanent Olympic site? Why, in Greece, of course, where the Olympics originated in 776 B.C. and continued until 393 A.D. There could be no more authentic place to have today’s marathoners run than in Marathon itself – no more meaningful place to have skiers schuss than on Mount Olympus, or to have boaters ply the very waters that warmed Odysseus’ odyssey.

New accounts in China drive global financial inclusion figures

Eric Duflos's picture

Nearly eight in 10 adults in China now have a bank account, according to the 2014 Global Findex. This represents a 15 percentage point increase since 2011. According to the survey, the number of global unbanked has decreased from 2.5 billion to 2 billion in the past three years, and China’s progress has been a major driver of this change. In fact, the 2014 Findex found that of the world’s 500 million newly banked adults, more than one third (180 million) live in China.

Three positive trends emerge from this data.

1. Rural and poor people constitute many of the “newly banked” adults.
Sixty-six percent of the poorest quintile in China now have a formal account which represents an increase of 28 percentage points over the past three years. The rural population – which includes most of the poor in China - also saw a major increase of 20 percentage points with 74 percent of rural adults formally banked in 2014. Women have significantly benefitted from this growth and are now almost as financially included as men.


Source: World Bank Findex 2014


Pages