DETERMINANTS OF FINANCIAL DEVELOPMENT

“Finance, Financial Sector Policies, and Long-Run Growth” by Ross Levine and Asli Demirgüç-Kunt

PRESENTED BY MARISHA TARDIF

DETERMINANTSDETERMINANTS

• HISTORICAL• LEGAL• POLITICAL• CULTURAL• ETHNIC• GEOGRAPHIC

• HISTORICAL• LEGAL• POLITICAL• CULTURAL• ETHNIC• GEOGRAPHIC

LEGAL TRADITION

• LAW ENFORCEMENT MECHANISMS• RIGHTS OF OUTSIDE INVESTORS

• PRIVATE PROPERTY RIGHTS• CONTRACT ENFORCEMENT

• COMMON LAW VS. CIVIL LAW• LEGAL SYSTEM ADAPTABILITY• EFFECTIVE CONFLICT RESOLUTION SYSTEMS

POLITICAL ECONOMY FORCES

• CLOSED POLITICAL SYSTEMS• OPEN POLITICAL SYSTEMS

GEOGRAPHIC FACTORS

• GEOGRAPHIC ENDOWMENTS• GEOGRAPHIC CONDITIONS- HOSPITABLE OR

UNHOSPITABLE ENVIRONMENTS

RELIGION, CULTURE, AND ETHNIC FACTORS

• RELIGION AND NATIONAL VIEWS• CULTURAL DIFFERENCES• ETHNIC DIFFRENCES AND CLASHES

POLITICAL TURMOIL

• CIVIL STRIFE• WAR• CORRUPTION AND CRIME• NEED OF A STABLE POLITICAL SYSTEM

THE GOVEERNMENT’S ROLE

• THE ROLE OF REGULATIONS AND ECONOMIC POLICIES IN INFLUENCING FINANCIAL DEVELOPMENT

• IS THERE A ROLE FOR GOVERNMENT IN THE REGULATION AND SUPERVISION OF FINANCIAL SYSTEMS? WHAT IS THE EXTENT OF THIS INVOLVEMENT

THE GOVERNMENT’S ROLE continued

• INVISIBLE HAND APPROACH• INTERVENTIONIST APPROACH

– 2 ASSUMPTIONS– That the government knows better than markets– That government acts in the best interest of society

• GREY AREA BETWEEN THE TWO

QUESTIONS IN APPLICABILITY...

• ADVANCED ECONOMIES VS DEVELOPING ECONMIES

• APPLICABILITY OF FIRST WORLD-DEVELOPED POLICIES TO THE THIRD WORLD

FINANCIAL LIBERALIZATION

• FOREIGN BANK PRESENCE- PROS AND CONS

FACILITATION OF ACCESS

• ACCESS TO FINANCIAL SERVICES AT THE FIRM AND HOUSEHOLD LEVEL

• MODERN DEVELOPMENT THEORY• THE PROBLEM OF SMALL ENTERPRISES AND

POOR HOUSEHOLDS

OBSTACLES...

• EDUCATION• SOCIAL AND PHYSICAL DISTANCE• LACK OF SUPPORTIVE SOCIAL NETWORK• LACK OF COLLATERAL

AND SOLUTIONS!

• MICROFINANCE• BRINGING EDUCATION ALONG WITH CREDIT

OPPORTUNITIES• GROUP LENDING SCHEMES• CREATION OF SUPPORT NETWORKS• CRITIQUE OF MICROFINANCE

CONCLUSIONS• CAUTION IN CREATION OF POLICIES FOR

COORDINATION PURPOSES• PRIORITIZATION ON ACCESS• INFRASTRUCTURE IMPROVEMENT IS A MUST• LEGAL REFORM• INCREASING AND ENCOURAGING COMPETITION IN

THE FINANCIAL SECTOR• LOWER ENTRY BARRIERS, FEWER REGULATORY

RESTRICTIONS ON BANK ACTIVITIES, REDUCTION OF GOVERNMENT OWNERSHIP THROUGH PRIVATIZATION, DOMESTIC AND INTERNATIONAL LIBERALIZATION