Showing papers by "Asli Demirguc-Kunt published in 2003"

Bank concentration and crises

Abstract: The authors study the impact of bank concentration, regulations, and national institutions on the likelihood of suffering a systemic banking crisis. Using data on 79 countries over the period 1980-97, they find that crises are less likely (1) in more concentrated banking systems, (2) in countries with fewer regulatory restrictions on bank competition and activities, and (3) in economies with better institutions, that is, institutions that encourage competition and support private property rights.

Finance and Growth: Theory, Evidence, and Mechanisms

Abstract: Nobel Prize Laureates and other influential economists disagree sharply about the role of the financial sector in economic growth. Finance is not even discussed in a collection of essays by the “pioneers of development economics,” which includes three winners of the Nobel Prize (Meier and Seers, 1984). Nobel Laureate Robert Lucas (1988) dismisses finance as a major determinant of economic growth calling its role “over-stressed.” Joan Robinson (1952, p. 86) famously argued that "where enterprise leads finance follows." From this perspective, finance does not cause growth; finance responds automatically to changing demands from the “real sector.” At the other extreme, Nobel Laureate Merton Miller (1988, p.14) argues that, “[the idea] that financial markets contribute to economic growth is a proposition too obvious for serious discussion.” Similarly, Bagehot (1873), Schumpeter (1912), Gurley and Shaw (1955), Goldsmith (1969), and McKinnon (1973) have all rejected the idea that the finance-growth nexus can be safely ignored without substantially impeding our understanding of economic growth. Resolving the debate and advancing our understanding about the role of financial factors in economic growth will help distinguish among competing theories of the process of economic growth. Furthermore, information on the importance of finance in the growth process will affect the intensity with which researchers study the determinants, consequences, and evolution of financial systems. Finally, a better understanding of the finance-growth nexus may influence public policy choices since legal, regulatory, tax, and macroeconomic policies all shape the operation of financial systems.

Small and medium enterprises across the globe: a new database

Abstract: This paper describes a new cross-country database on the importance of small and medium enterprises (SMEs). This database is unique in that it presents consistent and comparable information on the contribution of the SME sector to total employment and GDP across different countries. The dataset improves on existing publicly available datasets on several grounds. First, it extends coverage to a broader set of developing and industrial economies. Second, it provides information on the contribution of the SME sector using a uniform definition of SMEs across different countries, allowing for consistent cross-country comparisons. Third, while we follow the traditional definition of the SME sector as being part of the formal sector, the new database also includes the size of the SME sector relative to the informal sector. This paper describes the sources and the construction of the different indicators, presents descriptive statistics, and explores correlations with other socioeconomic variables.

Small and Medium Enterprises, Growth, and Poverty : Cross-Country Evidence

Abstract: The authors explore the relationship between the relative size of the small and medium enterprise (SME) sector, economic growth, and poverty using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 76 countries, they find a strong association between the importance of SMEs and GDP per capita growth. This relationship, however, is not robust to controlling for simultaneity bias. So, while a large SME sector is characteristic of successful economies, the data fail to support the hypothesis that SMEs exert a causal impact on growth. Furthermore, the authors find no evidence that SMEs reduce poverty. Finally, they find qualified evidence that the overall business environment facing both large and small firms-as measured by the ease of firm entry and exit, sound property rights, and contract enforcement-influences economic growth.

Bank Supervision and Corporate Finance

Abstract: The authors examine the impact of bank supervision on the financing obstacles faced by almost 5,000 corporations across 49 countries. They find that firms in countries with strong official supervisory agencies that directly monitor banks tend to face greater financing obstacles. Moreover, powerful official supervision tends to increase firm reliance on special connections and corruption in raising external finance, which is consistent with political and regulatory capture theories. Creating a supervisory agency that is independent of the government and banks mitigates the adverse consequences of powerful supervision. Finally, the authors find that bank supervisory agencies that force accurate information disclosure by banks and enhance private monitoring tend to ease the financing obstacles faced by firms.

Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation

Abstract: This paper examines the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data on over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation. Inflation also exerts a robust, positive impact on bank margins and overhead costs. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins and overhead expenditures. Thus, bank regulations cannot be viewed in isolation; they reflect broad, national approaches to private property and competition.

The impact of bank regulations, concentration, and institutions on bank margins

Abstract: This paper examines the impact of bank regulations, concentration, inflation, and national institutions on bank net interest margins using data from over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost net interest margins. Inflation also exerts a robust, positive impact on bank margins. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins. So, bank regulations cannot be viewed in isolation. They reflect broad, national approaches to private property and competition.

Financial and legal institutions and firm size

Abstract: The authors investigate how a country's financial institutions and the quality of its legal system explain the size attained by its largest industrial firms in a sample of 44 countries. Firm size is positively related to the size of the banking system and the efficiency of the legal system. Thus, the authors find no evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system. But they do find evidence that externally financed firms are smaller in countries that have strong creditor rights and efficient legal systems. This suggests that firms in countries with weak creditor protections are larger in order to internalize the protection of capital investment.

Bank concentration and crises

Abstract: The authors study the impact of bank concentration, regulations, and national institutions on the likelihood of suffering a systemic banking crisis. Using data on 79 countries over the period 1980-97, they find that crises are less likely (1) in more concentrated banking systems, (2) in countries with fewer regulatory restrictions on bank competition and activities, and (3) in economies with better institutions, that is, institutions that encourage competition and support private property rights.

Bank Supervision and Corporate Finance

Abstract: We examine the impact of bank supervision on the financing obstacles faced by almost 5,000 corporations across 49 countries. We find that firms in countries with strong official supervisory agencies that directly monitor banks tend to face greater financing obstacles. Moreover, powerful official supervision tends to increase firm reliance on special connections and corruption in raising external finance, which is consistent with political/regulatory capture theories. Creating a supervisory agency that is independent of the government and banks mitigates the adverse consequences of powerful supervision. Finally, we find that bank supervisory agencies that force accurate information disclosure by banks and enhance private monitoring tend to ease the financing obstacles faced by firms.

Legal Theories of Financial Development

Abstract: This paper examines legal theories of international differences in financial development. The law and finance theory stresses that legal traditions differ in terms of (i) their emphasis on the rights of private property owners vis-a-vis the state and (ii) their ability to adapt to changing commercial and financial conditions, so that historically determined legal traditions shape financial development today. Other theories reject the centrality of legal tradition in accounting for cross-country differences in financial development. The results are broadly consistent with legal theories of financial development, though it is difficult to identify the precise channel through which legal tradition influences financial development.