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.
The frequency of natural hazards has increased over time. From 1970 to 2010, approximately 3.3 million people were killed (on average, 82,500 deaths per year), and the property damages exceeded US$2,300 billion, or 0.23% of the cumulative world output. After a disaster, governments should be able to respond fast with robust emergency relief aid as well as reconstruction. In fact, they should rebuild better. However, the average fiscal response after disasters across countries and time is close to zero (Melecky and Raddatz 2008, table 2).  This result can stem from very heterogeneous responses of countries, including due to the varying available fiscal space and ability of the private sector to respond alongside the government. In addition to good preparation, having available resources to respond after disasters is key, and financial development could help.
Effective management of retirement savings is fast becoming an important agenda in many countries due to a rapidly ageing population. In addition to fulfilling this critical function, pension funds, which are theoretically long-only investors, perform an important role by providing long-term financing and liquidity to the rest of the financial system.
These large institutional investors are often thought of as stabilizers for the financial system and are expected to behave in a patient, counter-cyclical manner, making the most of cyclically low valuations to seek attractive investment opportunities. Moreover, since pension funds are expected to invest with a long-term perspective, these institutions have generally not been thought of as adding to systemic risk.
Today we release our new research paper and the 2014 Global Findex dataset, an updated edition of the world’s most comprehensive gauge of global progress on financial inclusion. It’s based on interviews with almost 150,000 adults in more than 140 countries worldwide.
We have plenty to celebrate:
- Account penetration is deepening in every region. Sixty-two percent of the world’s adult population has an account, up from 51 percent in 2011, when the Global Financial Inclusion database (as it’s known formally) was launched.
- The ranks of the unbanked are shrinking Worldwide, the number of adults without an account tumbled by 20 percent, to 2 billion.
- Mobile money accounts — accessed via mobile phone — is powering Sub-Saharan Africa’s march toward financial inclusion. While just 1 percent of adults globally use a mobile account and nothing else, 12 percent of adults in Sub-Saharan Africa have a mobile account — versus just 2 percent worldwide. Of those adults in Sub-Saharan Africa with a mobile account, 45 percent rely on that account exclusively.
I’m thrilled to announce the April 15 launch of the 2014 Global Findex database, the world’s most comprehensive gauge of global financial inclusion. Drawing on interviews with almost 150,000 adults in over 140 countries, the Global Findex tracks worldwide changes in account ownership and explores how adults save, borrow, make payments, and manage risk. Financial inclusion, measured by the Global Findex as having an account that allows adults to store money and make and receive electronic payments, is critical to ending global poverty. Studies show that broader access to, and participation in, the financial system can boost job creation, increase investments in education, and directly help poor people manage risk and absorb financial shocks.
Our research updates the first Global Findex database, which the World Bank launched in 2011 in partnership with Gallup, Inc. and with funding from the Bill & Melinda Gates Foundation. Their continued support made it possible to add new features to the second edition of the database, including more nuanced questions on mobile banking and an extended module on domestic payments. The 2014 Findex for the first time sheds light on how adults use accounts — and what can be done to have people become more active users of the financial system.
There is much good news to report…. But to learn the details, you’ll need to follow our data launch during the annual World Bank-IMF Spring Meetings.
In 2008, one year ahead of national elections and against the backdrop of the 2008–2009 global financial crisis, the government of India enacted one of the largest borrower bailout programs in history. The program known as the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) unconditionally cancelled fully or partially, the debts of up to 60 million rural households across the country, amounting to a total volume of US$ 16–17 billion.
The ‘safety trap’ hypothesis and secular stagnation
Noting that Eurozone inflation has been declining for almost a year, and constantly undershooting forecasts, Landau (2104) suggests that underpinning those evolutions, including the lack of growth, might be one factor: an excess demand for ‘safe assets’. Essentially — Landau argues — agents have responded to extreme risk aversion by developing a strong inclination for holding liquid and safe assets (typically money and government bonds). In order to accumulate more of these assets, they have reduced consumption and investment, thus depressing aggregate demand. When inflation is low and the economy hits the zero lower bound (ZLB), interest rates cannot reach their (negative) equilibrium levels and the economy falls into what Landau refers to as a ‘safety trap’, with cumulative disinflation, increasing real interest rates, and depression setting in. This sounds as a plausible explanation for secular stagnation in the Eurozone.
In a new paper, we address this question using detailed manufacturing census data from India. India offers an ideal laboratory for testing the role of institutions on firm lifecycle given the large persistent differences in institutions, business environment, and income across different regions. Specifically, we examine the relationship between plant size, age, and growth and ask: how does local financial development influence the size-age relationship? Are there differences in the size-age relationship across different industry characteristics and between the formal and informal manufacturing sector and does this vary with the extent of local financial development? Does the role of local financial development on firm lifecycle vary with major regulation changes in India such as financial liberalization, changes in labor regulation, and industry de-licensing?
Since the late 1990s, the importance of multinational banks has grown dramatically. Between 1999 and 2009 the average share of bank assets held by foreign banks in developing countries rose from 26 percent to 46 percent. The bulk of the pre-global crisis evidence analyzing the consequences of this significant transformation in bank ownership suggests that foreign bank participation brought many benefits to developing countries, especially in terms of bank competition and efficiency.
The recent global financial crisis, however, highlighted the role of multinational banks in the transmission of shocks across countries. Most of the research has focused on transmission through the lending channel – how foreign bank lending behaved during the crisis. A number of papers, including some before the recent global crisis, have documented that lending by foreign bank affiliates declines when parent banks’ financial conditions deteriorate.
One of the main obstacles that firms in developing countries face is lack of access to credit. A key factor that restricts access is insufficient collateral. Interestingly, banks in less-developed countries usually lend only against real estate; they rarely lend against other assets such as machinery, equipment, or inventory. The problem is that assets such as machines and equipment often account for most of the capital stock of small and medium-size firms. In this context, these assets become “dead capital”: they lose their debt capacity and only serve as inputs in the firms’ production processes.
While it’s true that machines and equipment are less redeployable than real estate, banks in developed countries do lend against these types of assets. In a recent study with Murillo Campello, we argue that the root of the problem lies in weak collateral laws. The law makes a clear distinction between two types of assets: immovable assets (e.g., real estate) and movable assets (e.g., machinery and equipment). Developing countries have weak collateral laws regarding movable assets, which makes its very difficult to pledge these assets as collateral. This shrinks the contracting space, since the menu of collateral becomes smaller, which limits access to credit. Moreover, since movable assets lose debt capacity, firms under-invest in technologies intensive in movable assets.