Finance: Research, Policy and Anecdotes

Finance and Development: The Unfinished Agenda

Almost 25 years after the empirical finance and growth literature started with simple cross-country regressions (King and Levine, 1993), this field of research seems far from saturated.  Aggregate cross-country regressions have given space to carefully identified studies using observational or experimental micro-level data. Asli Demirguc-Kunt, Ross Levine and I put together a one day conference at the World Bank in Washington DC last week to highlight some of the recent work in this area but also point to open reseach and policy questions. Almost a decade after the Global Financial Crisis and seven years into the Eurozone crisis, the role of the financial sector is challenged in many advanced countries, while many developing countries struggle with the right policy mix to deepen and broaden their financial systems.  Across the globe, however, and this came out again and again in the different sessions is the (often unhealthy) influence of politics in both development and efficiency of the financial system. 


A fascinating set of papers shed light on many of the recurrent research but also pressing policy questions.  The SME session included a paper by Allen Berger, Christa Bouwman and Dasol Kim on the continuing importance of small banks for alleviating small businesses’ financing constraints across the U.S., especially during economic downturns and financial crises. A paper by Charles Calomiris, Mauricio Larrain, Jose Liberti and Jason Sturgess points to the importance of movable collateral registries for resource allocation. Specifically, using a unique cross-country micro-level loan data they show that loan-to-value ratios of loans collateralised with movable assets are lower in countries with weak collateral laws, relative to immovable assets, and that lending is biased toward the use of immovable assets. 


A session on entrepreneurship included a paper by Meghana Ayyagari, Asli Demirguc-Kunt and Vojislav Maksimovic on firm growth over the first decade of a firm’s life in India, showing that it is all in the beginnings: the size and characteristics of a firm at entry are persistent over the first eight years of a firm's life; access to external finance is associated with greater overall entry, and also smaller sized entry, but cannot explain different subsequent growth rates across firms of different initial sizes.  Ross Levine presented a fascinating paper (joint with Yona Rubinstein) on entrepreneurs in the U.S., showing that transformational entrepreneurs (those requiring comparatively strong nonroutine cognitive abilities) are not only smart, but have often run into troubles in their teenage years (parents of teenagers like myself took careful note of this finding!)


The inclusion saw a nice overview piece by Leora Klapper on the most recent Global Findex results and a fascinating paper by Alex Popov and Sonia Zaharia on the importance of financial liberalisation for closing the gender gap in the labor market in the U.S.  Finally, Jonathan Morduch offered early results on a randomised control trial involving a mobile money provider (bKash) in Bangladesh.


The conference started and ended with policy panels on open questions in the development, stability and global agenda on financial sector policies. One important lesson (as stressed by Randall Morck) is that a critical review of financial history is always useful to understand today’s challenges.  And as important as we often see finance, it is certainly not the only and sometimes not even binding constraint;rather, it has to be seen in the context of the bigger picture of macro-, socio-economic conditions and the institutional framework in a country. 


The conference has certainly also pointed to future research gaps and policy challenges, including in better understanding entrepreneurship, demand-side constraints to financial inclusion and policy sequencing in financial sector reform. A truly unfinished agenda; or rather: a continuing never-ending journey. 


On a final note, this conference was partly motivated by a Handbook on Finance and Development that Ross Levine and I are putting together and that will be published next year. Stay tuned.