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Research Highlights 2009: Finance and Private Sector Development

Themes |  HighlightsTeam |  NotesCurrent Research Program |  2009 Publications

 

The Finance and Private Sector Development group focuses on understanding the role of the financial and private sectors in promoting economic development and reducing poverty, and identifying policies to improve their effectiveness. Finance research is organized around access to financial services and risk management and stability. Private sector development research focuses on determinants of firm entry and performance to better understand the microeconomics of the growth process.

Themes

2009 Annual Research Highlights Report Cover

 Full Report

The research on access to finance—which is important in promoting growth and alleviating poverty—includes documenting and benchmarking access to financial services by small firms and poor households, and identifying underserved groups and analyzing barriers to building more inclusive financial systems. Evaluative research is studying the channels through which access to finance can contribute to growth through promoting entrepreneurship, innovation, and the process of technology adoption.

Research on the private sector focuses on firm dynamics—changes in the composition of the private sector and entry and exit over time—and performance, and how this affects firm productivity and growth. Special areas of focus include research on the determinants and consequences of informality, innovation, and governance as well as the impact of the business environment and its reforms.

The 2008 financial crisis was a shock to conventional thinking and revealed key knowledge gaps in finance and private sector areas. First, how do we ensure that financial systems are growth-promoting and inclusive, yet stable? What are the key trade-offs? What roles do financial liberalization, regulation and supervision, and financial education play in this process?

Second, are there optimal financial structures at different stages of the development process? What does this imply for the role of banking versus market development, banking structure and size distribution? Third, which policy interventions enhance the role of the private sector in promoting development? Finally, what are the new lessons from the latest crisis and how do they alter our policy advice in the areas of finance and private sector development?

Highlights

Have the rules of finance changed after the crisis? 

Two conferences focused on areas needing more out-of-the-box thinking as a result of the crisis: financial regulation, insolvency resolution, and innovation and riskmanagement trade-offs.1 

Research on the causes of the crisis attributes  a significant role to faulty micro-incentives.2 It has also investigated the implications of the crisis for macro and financial policies, emphasizing that the challenge of financial sector policies is to align private incentives with public interest without taxing or subsidizing private risk-taking. The analysis suggests that public ownership or regulation that is too aggressive would simply hamper financial development and growth. But clearly striking this balance is becoming increasingly complex in an ever more integrated and globalized financial system.3  

Investigating the financial system trends in the boom period leading up to the global crisis shows that lower margins from traditional lines of business and the search for higher returns were only possible through high risk-taking, especially in high-income countries.4 Analyzing bank activity and funding strategies during this period also shows that overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.5  

How can we create jobs?

The recent financial crisis and the resulting high unemployment have sparked a renewed interest in government policies to create jobs. In Mexico business environment reforms, as well expanding access to finance, have played an important role in job creation by fostering entrepreneurship. Simplified  business registration procedures led to an increase in the number of registered firms and raised employment by 2.8 percent.6 Opening banks for low-income individuals increased the number of informal businesses, which was also accompanied by a rise in employment, by 1.4 percent.7  

Recent labor market regulations on Chinese firms affected firm performance, labor wages, and job creation, leading to labor downsizing with negative short-term effects on productivity, but smaller productivity losses for smaller private firms compared to state-owned firms (though the reverse is true for wage losses), indicating a stronger profit incentive for private firms.8 A Conference on Entrepreneurship and Growth examined a broader set of policies and interventions that could promote entrepreneurial activity and create jobs.9 

Microenterprises are an important source of employment in most developing countries. Yet few of the self-employed grow beyond subsistence level. Research in Sri Lanka examining the role of credit constraints in limiting the growth of enterprises found that more capital improves profits for male-owned microenterprises, but not female-owned microenterprises.10 One argument to explain this outcome is that female-owned enterprises are constrained by the sectors the owners operate in, and by household bargaining issues, suggesting job creation efforts also need to focus on the types of jobs created, not just whether there is a job.

Another constraint to the growth of small enterprises is often thought to be informality. Research in Bolivia shows large gains to small enterprises from formalizing, but only for those firms that are constrained by information or distance from registering their businesses. Sole proprietorships appear to not benefit from formalizing.11

Asli Demirgüç-Kunt, Senior Research Manager

Deniz Anginer

Miriam Bruhn

Robert Cull

Xavier Gine

Leora Klapper  

Inessa Love

Maria Soledad Martinez-Peria 

David McKenzie

Ouarda Merrouche

L. Colin Xu

Bilal Husnain Zia

Notes 

1.Conference on “Managing Systemic Crises and Redesigning Financial Systems,” International Monetary Fund and World Bank, May 26, 2009.
Agenda and Papers
 Resulting publication: Claessens, Stijn, Asli Demirgüç-Kunt, and Fariborz Moshirian, ed. 2009. Special Issue on “Financial Globalisation, Risk Analysis and Risk Management.” Journal of Banking and Finance 33(11, November).
 Conference on “The International Financial Crisis: Have the Rules of Finance Changed?” co-sponsored by the Federal Reserve Bank of Chicago and the World Bank, September 24- 25, 2009, examined the recent global financial upheaval, whether financial principles seem to have shifted in recent years, and what that may mean for international financial markets and regulation. 
Agenda and Papers
 Resulting publication: Demirgüç-Kunt, Asli, Douglas Evanoff, and George Kaufman, ed. Forthcoming. International Financial Crisis: Have the Rules of Finance Changed? Hackensack, NJ: World Scientific Publishing.
2.Caprio, Gerard, Asli Demirgüç-Kunt, and Edward Kane. Forthcoming. “The 2007 Meltdown in Structured Securitization: Searching for Lessons, not Scapegoats.” World Bank Research Observer 25(1). (Based on Policy Research Working Paper 4756)
3.Demirgüç-Kunt, Asli, and Luis Servén. Forthcoming. “Are All Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies.” World Bank Research Observer 25(1). (Based on Policy Research Working Paper 4807)
4.Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. Forthcoming. “Financial Institutions and Markets across Countries and over Time.” World Bank Economic Review 24(1).
5.Demirgüç-Kunt, Asli, and Harry Huizinga. Forthcoming. “Bank Activity and Funding Strategies: The Impact on Risks and Returns.” Journal of Financial Economics.
6.Bruhn, Miriam. Forthcoming. “License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico.” Review of Economics and Statistics. (Based on Policy Research Working Paper 4538)
7.Bruhn, Miriam, and Inessa Love. 2009. “The Economic Impact of Banking the Unbanked: Evidence from Mexico.” Policy Research Working Paper 4981, World Bank, Washington, DC.
8.Dong, Xiao-Yuan, L. Colin Xu. 2009. “Labor Restructuring in China’s Industrial Sector: Toward a Functioning Urban Labor Market.” Journal of Comparative Economics 37(2): 287-305.
9.Conference on Entrepreneurship and Growth, November 19-20, 2009, World Bank Headquarters, Washington, DC. Organizers: Leora Klapper and Inessa Love.
Agenda and Papers
10.De Mel, Suresh, David McKenzie, and Christopher Woodruff. 2009. “Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns.” American Economic Journal: Applied Economics 1(3): 1-32.
11.McKenzie, David, and Yaye Seynabou Sakho. Forthcoming. “Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability.” Journal of Development Economics.
 

  



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