Finance: Research, Policy and Anecdotes

I participated in an interesting workshop on mobile money last week that brought together academics, policy makers and practitioners and was organized by the International Growth Centre at LSE.   It has been 10 years now that M-Pesa took off in Kenya and it is hard to keep up with all the developments in Kenya and other countries.  The number of mobile money accounts (be they stand-alone or linked to bank accounts) has exploded over the past years, though their use is not as high as the pure account number suggests.  They are still mostly used for transaction purposes, in spite of product offerings in the savings and credit space.  Importantly, the use of mobile money is part of a wider trend of using mobile technology for government and other transfers, reducing transaction costs and “leakages” related to corruption and theft.  And while mobile money has not been the silver bullet in terms of expanding financial inclusion to the last household in the developing world, it has helped expand the frontier of bankable population substantially.  I do not think that the promise of mobile technology has been quite exhausted yet. But it has also become clear that there are other constraints holding back the full use of mobile money technology, including on the demand side (including behavioural constraints, as so prominently featured by the latest Nobel Prize winner Richard Thaler).


My own contribution was giving a quick overview of a task force report from 2016, co-led by Stijn Claessens and Liliana Rojas-Suarez and in which I participated.  As mobile money expands, the question on how to regulate its providers and users rapidly arises.  Where mobile money provision is restricted to banks this question is easily answered by expanding bank regulation to this new payment and account form.  It is where mobile money is offered by non-bank providers that this question becomes relevant.  Among other factors, the regulatory approach in Kenya has contributed to the success of M-Pesa by using a wait-and-see approach, which has been adapted into a regulatory sandbox approach in other countries (allowing new players into the market on limited scale without stifling regulation, but monitoring them carefully).


The task force report on Financial Regulations for Improving Financial Inclusion starts with three broad principles: similar regulations for similar functions (no matter what the name of the provider), regulation based on risk (to avoid reverting gains in financial inclusion made thanks to mobile money) and a balance between ex-ante and ex-post regulations (regulatory restrictions and penalties).  These principles are then translated into 26 recommendations across three areas – competition policies, levelling the playing field, and know-your-customer (KYC) regulations.  The goal is to allow and encourage entry of new, qualified providers of financial services, without deterring useful cooperation where needed to achieve the necessary scale.  This gets to a broader challenge in mobile money (but also other segments of the financial systems) – strong network externalities easily result in a winner takes all situation, where innovation only comes about if the winner is assured the biggest share of pie; on the other hand, such a market-dominating position can easily stifle future entry and innovation. In the area of inter-operability (between mobile networks, in agent networks etc.) this trade-off become quite prominent, but it is clear that one single approach does not fit all circumstances. It is also important that non-bank mobile money providers are regulated according to the risk they pose for the financial system, which depends on the type of services they offer, which range from simple transaction services, over value store service to intermediation services.  Only the last would require full prudential regulation. Finally, KYC regulations should internalize the trade-off between inclusion and integrity objectives – many countries have now adopted risk-based KYC regulations, which exempts basic accounts with a limited number of transaction s and a small volume from standard KYC rules. 

I had the privilege of moderating a panel discussion at the DebtCon (Interdisciplinary Sovereign Debt Research and Management Conference) in Geneva this week under the theme of “Whither Europe?” As impressive as the individual panelists were, the combination was even more interesting, as were the exchanges among panelists and with the audience. We touched upon a broad array of topics under one overarching theme: what are the long-term perspectives for the Eurozone and the European Union?


Frank Gill from Standard and Poor’s thinks the Eurozone crisis is over and pointed to reduced balance of payments imbalances as clearest indication.  However, he also pointed to continuous imbalances in financial accounts, which raises the perspective of future fragility, especially in the absence of effective private risk sharing mechanisms in the form of a pan-Eurozone banking market.

Chiara Zilioli (ECB) reported on the progress that has been made in converting the ESM into a full-fledged EMF, which should make future sovereign crises easier to handle (by an explicit mandate to restructure an unsustainable sovereign debt burden, provision of liquidity to financially distressed Eurozone governments, but also with policy conditionality) and would be a more institutionalized replacement for the Troika.  On the other hand, Maria Cannata from the Italian Treasury thinks it is rather risky to discuss debt restructuring in the first place, so as to not invite speculative attacks.  She insisted that Italian sovereign debt is categorically sustainable, in spite of doubts expressed by academics (e.g., by co-organizer Ugo Panizza and Barry Eichengreen).  Is the problem really solved if we do not talk about it, I wonder? And do such sustainability predictions rely on permanently low interest rates?


Michel Aglietta (CEPII) took a long-term perspective and focused on the need for joint, infrastructure investment and countercyclical fiscal policy in the Eurozone or even the European Union, similar to the Juncker plan, and on the suggestions of creating a small Eurozone budget with a finance minister.  My doubt is to what extent such long-term investing and infrastructure projects have to be undertaken exclusively with public money and under government management or whether this should be a task for and provide the impetus to construct a capital market union to lever private resources. Several panelists pointed to the need for a fiscal union (however small it starts) in spite of arguments by Martin Sandbu to the contrary. I am in the middle of this and agree with Martin that in the presence of a well working private risk sharing mechanism (which would imply not just completing the banking union but getting effectively to a single Eurozone banking market and frictionless capital markets) a fiscal union might not be as necessary.  The problem is that it’ll take some time until we get to this single Eurozone banking market and the start into a fiscal union cannot only be a useful macroeconomic tool but might also help reignite popular support for the European idea, if done correctly.


Last but not least, Yannis Manuelides pointed to the accountability-decision-taking conundrum (my wording) in the Eurozone and European Union. Political accountability is currently primarily at the national level but more and more of the decision-taking has to happen on the Eurozone level, without there being an equivalent institutional structure of voice and accountability.   This important point relates back to the discussion on the rise of populism across Europe and the increasing disenchantment of people with the European Union and the European idea. Some contributors to our book Quo Vadis Europe? have pointed to a concrete example in that it is the European Union that imposes austerity while at the same time seemingly not offering any social safety net (which has stayed on the national level).   In my view, this points to a deeper problem: the European project including the Eurozone has been constructed through inter-governmental agreements (even though ratified by national parliaments or even national referendums) – does Europe need a Constituante?


In conclusion – yes, the crisis is over, but after the last crisis is always before the next crisis.  Europe has started the process of building better crisis management institutions and tools.  Are we there yet?  Not quite yet…   Whither Europe?  No, as long as we avoid the pitfalls of nationalist and populist politics and economics. 

The German elections from last Sunday have been described as a watershed moment for post-WW II Germany – the first time a rightwing populist party (AfD) enters parliament, and right away as third-largest party. For those Germans – like me – who still view and judge German politics under the historic legacy and burden of the Third Reich this is indeed shocking and worrisome. On the other hand, many observers have described the elections as the moment when Germany became a normal country, normal like most other European countries with a right-wing populist party.  The question is whether this is simply a new status quo or the entry door to something far worse, as in 1930 (when the NSDAP had its electoral breakthrough moment). The new constellation has also complicated the formation of a new government coalition enormously.  Having lived more than five years in The Hague, I had a deja-vu moment on Sunday evening – Germany finally turns Dutch - a multi-party parliament where you need more than two parties to form a government. And that is where there is a positive aspect.  For the first time on federal level, a government might include two smaller parties (Liberals and Greens) from two opposing camps and who normally would not govern together.  That finally moves German politics away from the rigid political camp approach where smaller parties are bound to a larger partner (Liberals to Christian Democrats and Green Party to Social Democrats).  While already overcome on the state-level, such a “transactional” rather than ideologically coherent federal government can be seen as progress.


The results of the German elections stand in the tradition of a populist wave on both sides of the Atlantic.  After Macron’s election as French president one might have thought mistakenly that the wave has been beaten back – and with 13%, the AfD is still a rather small group – but the struggle continues for the liberal democratic centre. The underlying conditions of a population segment that feels left behind – in economic, social and cultural terms – are still there and have to be addressed.  It is interesting that the social democrats have campaigned on the theme of social justice and redistribution, but have not managed to appeal to this population segment.  Rather than blaming immigration (which is rather low in areas with high AfD support), it might be a cultural disconnect between leftist intellectuals and population segments in rural, poorer areas that simply do not feel well represented by the urban global elite.  It is a problem beyond economics and thus a challenge for all social scientists. Having just read Hillbilly Elegy, I am increasingly convinced that this was not just another protest vote, but the result of a long-term cultural process of alienation.


It is in these days that politicians have to lead rather than follow the Zeitgeist.   Angela Merkel stands in the tradition of Konrad Adenauer and Helmut Kohl as transformative political leaders of post-WW II Germany – the former because of the Franco-German reconciliation with Charles de Gaulle, the latter because of the German unification. By opening the border to the refugees in 2015, Angela Merkel looked beyond any political calculus and followed beliefs and instincts. She has changed the face and socio-demographic structure of Germany forever. It is now her turn to use her fourth and final term in office to work against the populist Zeitgeist to strengthen Eurozone integration, save globalization from its excesses but also slow destruction by Donald Trump and his followers, and uphold a tolerant and liberal society in Europe. She has a willing partner on the other side of the Rhine – it is up to her to use this historic opportunity

Last week I started my appointment as the 6th Tun Ismail Ali Chair, at the University of Malaya in Kuala Lumpur, a chair sponsored by the Malaysian Central Bank.  The first chair holder was the late Ronald McKinnon and I feel certainly honored to follow him, though these are certainly big shoes to fill. Until summer 2018 I will spend a total of around two months at the University of Malaya and the Central Bank, interacting with researchers, analysts and policy makers and giving lectures and seminars.


Malaysia is a fascinating and interesting country, in many aspects.  While often in the shadow of Singapore (part of the original Malaysian federation), its financial system is also a very developed one.  Its Private Credit ratio stands at well over 100% and well above the value predicted by GDP per capita and other socio-economic factors. Similarly, its capital market and contractual savings institutions are well developed.  It has also aimed at becoming a global Islamic finance centre, with research institutes to support it.  In terms of regulatory policies, it is certainly interesting, having been the outlier after the East Asian crisis in imposing capital controls.  Politically, it is similarly fascinating, a constitutional monarchy with rotating kings (drawn from the nine sultans the country has) and with a careful balance between the three ethnic groups.   I am very much looking forward to my next visit in November. 

We economists keep getting into headlines for the wrong reasons – if it is not for having missed a crisis or for seemingly squabbling over the effects of Brexit, then it is for a sexist culture.  Following the publication of Alice Wu’s paper, reported in the NYT, there has been an intensive discussion on the under-representativeness of women in the economics profession, but also more broadly about the culture in our profession.


I have never contributed to EJMR but do check in once in a while, mostly to see whether my name or that of my current or previous employers pops up. So far, I have been lucky and not been subject to any of the hateful threads started by what can only be bored and/or frustrated PhD students.  However, one of my PhD students has been subject to unfounded accusations of plagiarism and another PhD student in Tilburg has been subject to sexist remarks.


My main problem with this web-site is that while good and important information is being shared (sometimes in the form of gossip), there are still too many threads, which either target people for all the wrong reasons or just rehash the same silly arguments over and over again (such as the repetitive threads about the quality and standards of the Review of Finance).


I do not believe that EJMR should be shut down, but it certainly needs a lot more rigorous monitoring – obviously, I understand that this would be a thankless job, unpaid with not even intellectual gratification.  There are, however, examples of discussion boards that do allow for useful information exchange and friendly banter – my favorite example (not surprising given my life-style) is (where I do contribute once in a while).


As pointed out by James Campbell and others  the discussions on EJMR are the symptom for a deeper problem in our profession, with a hierarchical structure of journals and schools and underrepresentation not only of women but different ethnic minorities (especially in the US), but also a certain degree of aggressiveness among academic economists. I share his view that more can be done to “bring together” the profession and bring down barriers of arrogance and clubiness.   However, there are also small steps that we can do. As previously reported, I was part of a great workshop in Bonn recently, “teaching” post-docs and assistant professors from German universities on how to publish in finance journals.  I was subsequently asked to give a seminar on the same topic at the Bank of England, where there are lots of very bright economists, often with PhDs from top universities but with limited experience in the publication game, for no fault of their own (as they are too busy saving the UK economy from the Brexit damage).  I think a lot can be done on a more informal level!


I do not think it makes any sense whatsoever to “ban” EJMR, rather the profession should learn from it.  Alice Wu’s paper is a great start and holds an impressive mirror up to our profession.  Rather than getting upset, we should see this as opportunity!