The causal link between finance and growth is one of the most striking empirical macroeconomic relationships uncovered in the past decade. As this branch of the literature matures, the focus shifts from growth to other aspects of economic prosperity and from financial depth to multidimensional measures of financial development. This paper reviews the evolution of the literature and contributes by (i) showing that financial depth is negatively associated with headcount poverty, even after taking account of mean income and inequality; (ii) illustrating the pitfalls in equating financial development with financial depth and (iii) proposing alternative measures of financial development that, though summary, capture its multidimensional nature.

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Financial development, growth and poverty: how close are the links?

Alternatives to blanket guarantees for containing a systemic crisis

Many of the distortions in poorly performing economies do not originate in the banking sector, but where state banks still control a large share of the resources in the banking system, they continue to pose a risk to macroeconomic and fiscal stability. State banks are typically vehicles for patronage that worsen the prospects for competitive market development. Alternatively, these state banks can be ineffective shells that fail to perform a useful intermediation role once the government imposes effective hard budget constraints and a modern supervisory system. The most problematic state banks have been agricultural and industrial banks, whose original role was to finance state farms and industrial enterprises that employed large numbers of people and served as the backbone of the socialist economic mode. Banks now show stronger growth in deposits and capital in many countries in Central and Eastern Europe and the Baltics, suggesting that these countries have put into place structures that have helped to restore confidence in banking systems among creditors, investors, and the public. Recommended strategies are that Governments need to design strategies to reduce state banking in order to help create a stable banking environment. Governments should take measures to improve the business environment as part of a broad overall strategy to strengthen the financial system and end state ownership of banks. Such measures include providing support to improve corporate governance, reform judicial systems, build registries of collateral, reinforce creditors' rights and contract enforcement, modernize accounting and auditing practices, reduce administrative obstacles to business registration, and modernize bankruptcy laws.

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State-Owned Banks in the Transition: Origins, Evolution, and Policy Responses

We examine the efforts of transition economies to deal with financial fragility and resolve banking cries We characterize the birthing process of banking in transition and the three essential features of banking crises in transition economies: (i) bad loans and the relationship to state owned industries, (ii) development of institutional infrastructure and (iii) credible commitments to resolution and privatization. We then discuss the experiences of seven important transition countries in order to identify the salient features of their efforts to resolve banking crises.

Dealing with Financial Fragility in Transition Economies

We propose and test the proposition that state ownership represents an important mechanism of institutional-based trust production in market development that requires analysis in its own right, particularly following periods of financial crisis when the state’s role as a regulator is often viewed as ineffective or corrupt. To test the proposition that state ownership and state regulation act as distinct sources of institutional-based trust production, we examine individual choices of market participation and avoidance in Russia’s market for bank deposits. To analyze the consequences of institutional-based trust, we look at individual preferences to keep savings in a private bank, in a state bank, or in cash outside of the banking system. To analyze antecedent conditions, we measure an individual’s trust in political actors and government agencies. Our results support the proposition that the state produces institutional-based trust in the Russian banking system through its roles as both an owner and a reg...

Multiple Paths to Institutional-Based Trust Production and Repair: Lessons from the Russian Bank Deposit Market

This book examines progress within Russia's financial sector and provides a road map for promoting dialogue on and implementing improvements. The book is intended to complement and support the joint strategic plan of Russia's government and Central Bank for banking reform, a plan that includes many already-implemented legislative and regulatory efforts aimed at strengthening the Russian financial sector as a whole. The authors contend that any comprehensive strategy designed to enhance trust in Russian banking will need to focus on four major themes: 1) encouraging financial intermediation by improving the legal and accounting infrastructure for financial sector development; 2) improving the current structure and performance of the banking system; 3) improving the effectiveness of bank regulation, bank restructuring, and liquidation; and 4) enhancing enterprise access to finance.

Michael Fuchs

Papers

Building trust : developing the Russian financial sector