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Financial Sector

More Foreign Direct Investment in Retail for India?

Bingjie Hu's picture

Recently, India has seen a heated debate on the entry of foreign direct investment (FDI) in the country’s $400 billion retail market. In November 2011, the government proposed a policy change to open up the country’s multi-brand retail segment -- for retailers such as Wal-Mart and Carrefour. Foreign investors were to be allowed to own up to 51 percent of a multi-brand retailer if they invested at least $100 mn, with half spent on infrastructure development in India. Within weeks of the announcement, the government suspended the decision amid protests from opposition parties and small shopkeepers citing concerns over large scale job losses, especially in the small, unorganized retail sector.

What is FDI?

Foreign direct investment (FDI) refers to the net inflows of foreign investment to acquire a lasting management interest (more than 10 percent of voting stock) in a domestic company. In 1997, the government permitted 100 percent FDI in the wholesale cash and carry trade, in which customers arranged the transport of goods from wholesalers and paid for goods in cash (not credit), on a case-by-case basis.

Capital Account Liberalization: Are there Lessons to be Learned?

Otaviano Canuto's picture

Photo: WikiCommons User, CopyLeftAfter the Second World War, advanced economies began an ambitious process toward capital account liberalization, which prioritized the liberalization of trade, the maintenance of fixed exchange rates, and a commitment to current account convertibility.

Lucian Bebchuk’s Response on Executive Pay and the Financial Crisis

Lucian Bebchuk's picture

In his opening statement, René Stulz relies on the results of the Fahlenbrach-Stulz study (FS study) to reject the view that executive compensation has contributed to the financial crisis. Stulz argues that the evidence in his study is “inconsistent with the view that banks performed poorly because CEOs had poor incentives.” However, as explained below, the FS study does not provide a good basis for rejecting the poor incentives view.

The FS study attempts to test the “poor incentives” hypothesis by examining whether banks whose CEOs had larger equity holdings performed better during the crisis. Failing to find such an association – and indeed finding that such banks performed worse – the FS study rejects the poor incentives hypothesis. But the poor incentives view does not attribute poor risk-taking incentives to relatively low equity holdings, and the analysis in the FS study does not supply an adequate test of this view.

As I explained in my opening statement, the poor incentives view does not regard large equity holdings as the way to ensure good risk-taking incentives and does not view poor incentives as rooted in insufficient equity holdings. Rather, as I explained, poor incentives have resulted from (i) design of equity compensation (as well as bonus compensation) that rewarded executives even for short-term results that were subsequently reversed, and (ii) linking executive payoffs only to payoffs for shareholders and not also to payoffs for other contributors of capital to financial firms (such as bondholders).

Executive Compensation: The $950 Million Dollar Question

René M. Stulz's picture

The question of the debate is whether executive compensation contributed to the crisis. Does contribute mean that executive compensation affected the behavior of executives, or does it mean that executive compensation made the crisis significantly worse? If it means that it affected the behavior of executives, surely that is the case. With different compensation schemes, the financial system would have been different and the crisis would have been different. If it means that it made the crisis worse, how could we know that executive pay made the crisis worse? It is an empirical issue and only empirical work can resolve it. Unfortunately, there is very little empirical work so far because it is so difficult to determine ex ante what excessive risk-taking is and data on executive compensation is limited. 

Most of the studies of compensation arrangements in the financial industry look at the named executive officers in banks (i.e., the CEO, CFO, or President) because we have data on the compensation arrangements of these individuals. There has been much conjecture about compensation arrangements of traders in banks, but there is no data and thus no empirical evidence. In addition, even if we had such data, it could not be understood independently of the risk management practices of the institution. To see this, consider a trader: Risk-taking incentives for the trader can be affected by his compensation but also by how his performance is defined. If his funding cost reflects the risks he is taking, his attitude towards risk will be very different from a trader who pays the same cost that his institution pays regardless of the risks he takes. 

Turning to the evidence on compensation arrangements for top executives, the published work is the paper that Rudiger Fahlenbrach and I published in the Journal of Financial Economics and the paper that Lucian Bebchuk published with Alma Cohen and Holger Spamann in the Yale Journal on Regulation. Although I discussed my paper already in my first blog post, it is useful to show how different researchers can draw seemingly contradictory conclusions from the same data.

Infrastructure for Jobs in Tough Times

Caroline Freund's picture
The recently released Global Economic Prospects report cautions that a second global financial crisis emanating from the Eurozone is a serious threat. Among the policy recommendations for developing countries is to prioritize infrastructure spending, even in a tight budgetary environment, because of its importance as stimulus and for long-term growth. We couldn’t agree more. This is especially relevant for many countries in the Middle East and North Africa (MENA) region, where domestic uncertainty has already lowered short-run economic prospects and unemployment is on the rise. A forthcoming report (click here for summary), shows that investment in infrastructure contributes significantly to job creation in MENA.

The effects of the Euro zone crisis on the CFA franc zone: a View from Cameroon

Raju Jan Singh's picture

For French, click here.

As the sovereign debt crisis is unfolding, many are wondering what could be its effects on the economies of the CFA franc zone, a part of Africa with close relations with Europe, especially France. In the case of Cameroon, the Euro zone still represents the main market for the country’s exports and hosts the largest community of Cameroonians abroad.

Europe: Fiscal Stimulus versus Structural Reform, or More?

Zia Qureshi's picture

The current policy debate on spurring growth is sometimes couched as a binary battle between fiscal stimulus and structural reform. In the context of the euro zone, this gives an incomplete picture. Two other issues are important. Adding these complicates the picture, but it helps point the way to a fuller policy response and a clearer hierarchy among policy actions to address the current mutually reinforcing combination of a growing sovereign debt-banking problem on the one hand and fears of a recession on the other.

The first issue is the likelihood of a credit crunch as commercial banks scramble to meet higher capital adequacy ratios even as their portfolio of sovereign bonds deteriorates. Going to the markets to raise capital is not an attractive option, and banks are more likely to deleverage to meet the new capital requirements. The second issue is that of flagging confidence. This started rearing its head in the summer of 2011 with speculative attacks on the sovereign debt of Italy and Spain in addition to the EU/IMF-supported program countries (Greece, Ireland and Portugal). This confidence problem has its roots in the botched bailout of Greece and what is perceived as a weak crisis resolution framework in the euro zone. Table 1 attempts to pull the various elements together.

Table 1: Options for spurring growth

Job creation: a big role for big firms

Bob Rijkers's picture
SME promotion programs are becoming progressively more popular. While evidence on their effectiveness remains elusive, their policy prominence is predicated on the belief that small firms grow faster and generate the most jobs. Our preliminary analysis of the Tunisian registry of firms, which contains longitudinal information on all formal firms from 1996 until 2010, yields three stylized facts suggesting that large firms are far more important than small firms in generating employment and growth.

La crise de la zone euro et ses impacts sur l’Afrique sub-saharienne

Shanta Devarajan's picture

Lors d’une mission au Mali, j’ai présenté les constats du dernier « Pouls Africain » à un séminaire avec une centaine de participants, y inclus le ministre des finances du pays.   J’ai soulevé quatre points: