This report was published in May, 2001.
This report seeks to provide a coherent approach to financial policy design – one which will help policy makers select wise policy choices adapted to local circumstances and grasping the opportunities offered by the international environment.
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This research demonstrates conclusively something that many of us have believed to be true for a long time, that a sound financial sector is a critical ingredient for poverty-reducing economic growth. Some argue that the services in the formal financial sector only benefit the rich. But poor people suffer from the effects of a weak financial sector and from financial crises, even if they don't own shares or have a bank account.
—Nicholas Stern, Former Senior Vice President and Chief Economist, The World Bank
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It is not based on the application of abstract principles; rather conclusions are based on an analysis of concrete evidence. Though much remains to be learnt, a huge volume of empirical analysis, drawing on a growing body of statistical data, has been conducted on these issues over the past few years. The findings of this research greatly help to clarify the choices that are involved. Many long-held beliefs have found detailed empirical confirmation for the first time; some new and perhaps surprising discoveries have been made.
The authors ask policy makers to face the facts about finance. A few key messages have emerged from this research:
- A strong financial sector contributes to long-term prosperity
- Governments are not good at providing financial services – even when a crisis hits
- But well functioning financial markets need the legal and regulatory underpinning that effective governments provide, and a regulatory and supervision strategy based on harnessing incentives
- Finacial sector diversity - banks, other lending institutions, stock and bond markets, etc. - is good for stability
- Open markets and technology can spur financial sector development
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