Finance: Research, Policy and Anecdotes

Long-term finance-the new financial development frontier

Financial inclusion has been at the forefront of both financial sector policymakers' and researchers’ agenda for the past decade or so. Lots of progress has been made, from almost no consistent cross-country data to the Global Findex, a global household survey undertaken every three years.  An area that has not received as much emphasis, especially in terms of data collection, is long-term finance. Shallow financial systems across the developing world are not only characterised by limited financial inclusion, but also by a focus on short-term transactions, i.e., limited long-term savings instruments, limited long-term lending, including mortgage finance, and little if any capital market funding and contractual savings institutions.  And this on the background that the high economic volatility in these countries and their infrastructure needs makes the dearth of long-term finance especially binding for economic development. 

The most recent Global Financial Development Report of the World Bank provides an excellent overview of the literature in this area. It also shows the limited data sources that are available to gauge the availability of long-term finance across countries and over time. As donors become more interested in this area, there are more attempts to address this dearth of analysis and data. But what data sources are available and what indicators should we focus on?  And what are appropriate ways to compare such indicators across countries and over time? 

The inter-American Development Bank (IDB) recently asked me to develop a score board for long-term finance for Latin American countries.  In addition to a literature survey and providing an in-depth look at the provision of long-term finance across Latin America, I suggest several indicators of both depth and inclusiveness of long-term financial markets, i.e., considering both supply and demand side, but also several policy indicators that the literature has shown to be associated with effective provision of long-term finance, including monetary stability, effective contractual institutions and limited price distortions.  However, when assessing the depth and inclusiveness of long-term finance over time across and within countries, it is also important to benchmark it according to structural characteristics of economy, including size and income level.  We cannot expect the same level of long-term finance in larger countries (with the necessary scale for capital markets) as in smaller countries and richer economies (with the necessary supply of long-term savings and demand for such by enterprises) as in poorer countries; demographic structures might also play a role. Thus comparing the actual provision of long-term finance to such a benchmark (based on cross-country panel regressions, such as suggested in previous work) allows better identify the necessary policy and institutional gaps. 

Currently I am working on a similar assignment on Sub-Saharan Africa for FSD Africa, together with some long-standing collaborators.  Stay tuned for updates towards the end of the year.