Competition in the Financial Sector: Overview of Competition Policies

Competition in the financial sector, as in other sectors, mattersfor allocative, productive, and dynamic efficiency. Theory suggests,however, that unfettered competition is not necessarily bestgiven the special features of financial services. The authordiscusses these analytical complications before reviewing howto assess competition in the financial sector and its determinants.It is shown that competitiveness varies greatly across countries,in perhaps surprising ways, and that it is not driven by financialsystem concentration. Rather, systems with greater foreign entryand fewer entry and activity restrictions tend to be more competitive,confirming that contestability—the lack of barriers toentry and exit—determines effective competition. The authorthen analyzes how competition policy in the financial sectorhas generally been conducted and how changes in competitionin the financial services industries should affect competitionpolicy going forward. In part based on comparison with otherindustries, the author provides some suggestions on how competitionpolicy in the financial sector could be better approached aswell as what institutional arrangements best fit a modern viewof competition policy in the sector. The specific competitionchallenges for developing countries is also highlighted. Theauthor concludes that practices today fall far short of theneed for better competition policy in the financial sector. JEL codes: G10, G18, G28, L1, L5     

Promoting Efficient Rural Financial Intermediation

Although governments have traditionally used subsidized creditprograms to promote agricultural growth, this approach has generallyfailed to improve incomes and alleviate poverty in rural areas.It has also led to the mistaken belief that rural credit programscannot be profitable. A new approach seeks to raise standardsof living in rural areas by casting the government in a veryd role—one of setting a favorable legal andpolicy environmentfor rural financial markets and addressing spec market failurescost effectively through well-designed and self-sustaining interventions.There is evidence that this approach can be highly successful.The Village Bank system of Bank Rakyat Indonesia has shown thatfinancial services can be extended to millions of low-incomerural clients without relying on subsidies. Indeed, the programhas generated enormous profits for the bank by using simple,innovative, and largely replicable techniques.      

REFORMING FINANCE IN TRANSITIONAL SOCIALIST ECONOMIES

Financial reforms initiated in most transitional socialist economiesdo not yet adequately provide many of the financial servicesassociated with market-oriented financial systems. Such services—mobilizingresources, selecting firms and allocating capital, monitoringfirm managers, and facilitating the management of transactionsand risk—are a necessary condition for economic reformto improve living standards. This article envisages four central strategies to guide reformof the financial sector: • Building an infrastructure based on clear and enforceableproperty rights, modern accounting and auditing standards, reliablepayments systems, sound prudential and enforcement regulations,and professionals trained in finance • Ending the shell game of trying to hide the losses ofstate-owned enterprises, and separating government decisionsto finance "priority" firms from the allocation decisions ofindependent financial institutions • Privatizing some financial institutions early—althoughnot necessarily precipitously—in concert with the privatizationof firms and supervisory capabilities, meanwhile cleaning upbank loans to maximize the chances that firms and banks willsucceed as private entities • Improving the tax system and stressing a prudent interestrate policy to reduce uncertainty, distortions, and excessiverepression of the financial sector.      

Weak Links in the Chain: A Diagnosis of Health Policy in Poor Countries

Recent empirical and theoretical literature sheds light on thedisappointing experience with implementation of primary healthcare programs in developing countries. This article focuseson the evidence showing two weak links in the chain betweengovernment spending for services to improve health and actualimprovements in health status. First, institutional capacityis a vital ingredient in providing effective services. Whenthis capacity is inadequate, health spending, even on the rightservices, may lead to little actual provision of services. Second,the net effect of government health services depends on theseverity of market failures—the more severe the marketfailures, the greater the potential for government servicesto have an impact. Evidence suggests that market failures arethe least severe for relatively inexpensive curative services,which often absorb the bulk of primary health care budgets.A companion paper, available from the authors (seep. 219), offersa perspective on how government funds can best be used to improvehealth and well-being in developing countries. It gives an alternativeview of appropriate public health policy, one that focuses onmitigating the characteristic market failures of the sectorand tailoring public health activities to the government's abilityto deliver various services.      

国内金融市场完全开放对国有商业银行的影响

按照入世协定书中的开放时间表,我国在入世5年后也即2006年底将实行金融业的全面开放。本文认为,我国金融市场完全开放将对国内商业银行带来深远影响:一是在政策层面,经济政策、金融政策、配套政策的进一步开放将使金融业的进入门槛降低,从而带来竞争主体的多元和竞争的更加市场化;二是在市场层面,客户的金融知识的普及和客户的议价能力的提高造成客户对银行需求也在不断提高;三是在竞争层面上,竞争主体、竞争模式和竞争手段的改变将使银行业面临更为复杂的竞争局面。为应对上述影响,国有商业银行应根据自身优势,扬长避短,根据不同情况,综合运用不同战略,以期达到持续发展的目标。     

WHO WINS AND WHO LOSES FROM VOLUNTARY EXPORT RESTRAINTS?:The Case of Footwear

Voluntary export restraints have been a popular resort of industrialcountries faced with increasing competition from exports ofdeveloping countries. As a strategy for circumventing the rulesof the GATT (whose regulations preclude increases in tariffs),these nontariff barriers have been rather successful; whetherthey have been as successful in their aim of protecting andstimulating the industry concerned is another matter. This article looks at what happened when industrial countriesimposed—and then removed—voluntary export restraintson the footwear industry during the 1970s and 1980s. Why didprotectionism spread so fast and then dissipate almost as rapidly,and what effects did this coming and going have on the exportingcountries We suggest that industrial countries removed the restraintsbecause they found ?them either superfluous (the expected employmenteffect failed to materialize) or ineffective (the principalexporters maintained their market share during the height ofthe restrictions), or else because the industry was able toadjust by importing footwear at a profit. Predicting the effect of VERs, and determining how best to managethem, are critical questions for developing countries strugglingto improve their export performance in the 1990s. The resultsof detailed study of a representative industry, summarized here,may assist in the prediction and determination.      

ECONOMIC ANALYSIS FOR HEALTH PROJECTS

This paper applies to the health sector a method of projectanalysis advocated recently by Devarajan, Squire, and Suthiwart-Narueput.A health project evaluation should establish a firm justificationfor public involvement; establish the counterfactual—whatwould happen with and without the project; and determine thefiscal effect of the project and the appropriate levels of feesin conjunction with project evaluation. The evaluation shouldalso acknowledge the fungibility of project resources and examinethe incentives both for high-level public servants to shiftgovernment resources away from project-funded activities tothose that have not been evaluated and for lower-level contractorsand civil servants to provide good or bad service. Market failuresin health services and insurance markets should serve as a startingpoint for economic analysis, not as a reason to ignore economicsin health projects. Project outputs should be predicted aftertaking into account the reaction of consumers and providersin the private sector as well as market structures of supply,demand, and equilibrium for health services.      

Infrastructure Privatization and Regulation: Promises and Perils

Infrastructure is crucial for generating growth, alleviatingpoverty, and increasing international competitiveness. For muchof the twentieth century and in most countries, the networkutilities that delivered infrastructure services—suchas electricity, natural gas, telecommunications, railroads,and water supply—were vertically and horizontally integratedstate monopolies. But this approach often resulted in extremelyweak services, especially in developing and transition economiesand especially for poor people. Common problems included lowproductivity, high costs, bad quality, insufficient revenue,and shortfalls in investment. Over the past two decades manycountries have implemented far-reaching institutional reforms—restructuring,privatizing, and establishing new approaches to regulation.This article identifies the challenges involved in this massivepolicy redirection within the historical, economic, and institutionalcontext of developing and transition economies. It also reviewsthe outcomes of these policy changes, including their distributionalconsequences—especially for poor households and otherdisadvantaged groups. Drawing on a range of international experiencesand empirical studies, it recommends directions for future reformsand research to improve infrastructure performance.      

Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries

Mounting evidence suggests that excessive job protection reducesemployment and labor market flows, hinders technological innovations,pushes workers into the informal sector, and hurts vulnerablegroups by depriving them of job opportunities. Flexible labormarkets stimulate job creation, investment, and growth, butthey create job insecurity and displace some workers. How canthe costs of such insecurity and displacements be minimizedwhile ensuring that the labor market remains flexible? Eachof the main unemployment income support systems (unemploymentinsurance, unemployment assistance, unemployment insurance savingsaccounts, severance pay, and public works) has strengths andweaknesses. Country-specific conditions—chief among themlabor market and other institutions, the capacity to administereach type of system, and the size of the informal sector—determinewhich system is best suited to developing and transition countries.      

Crisis, Adjustment, and Reform in Thailand's Industrial Firms

New data on Thailand's industrial firms shed light on the originsof the East Asian financial crisis and on the response of themanufacturing sector to the structural adjust-ment program supportedby the international financial institutions. Before the crisis,Thai firms had declining profitability, but they neverthelessmaintained high levels of investment, often in domesticallyoriented areas (notably the auto sector). Thai firms financedthese investments with short-term borrowing from financial institutions,which in turn borrowed short term on foreign markets. That only40 percent of firms provided audited financial statements totheir banks meant that the financial sector had poor informationfor assessing the true riskiness of these investments. The financialstructure was thus vulnerable even to small shocks. How well did the adjustment program deal with the crisis? Thaifirms had difficulty increasing their exports quickly becauseof investment in the wrong sectors, a decline in regional demand,and bottlenecks that included red tape and poor customs administration.Because of the poor export response, the brunt of adjustmenthad to come through compression of demand and of imports. Inretrospect, the macroeconomic program— which assumed quickexport recovery— was too tight.      

Corporate Performance in the East Asian Financial Crisis

The sharp decline in the once-stellar performance of East Asiancorporations following the 1997 financial crisis has sparkedan intense debate. Some observers argue that external shocks,including a drop in aggregate demand and a shortage of workingcapital, explain the corporate sector's poor performance. Othersassert that the difficulties were apparent well before the crisisand that the risky financial policies pursued by these firmsleft them vulnerable. A survey of the literature shows littlemicroeconomic evidence to support either view. This article compares the growth and financing patterns of EastAsian corporations in the years before the crisis with thosein other countries. It finds little microeconomic evidence thatcorporate growth was weakening but some support for the argumentthat many firms had a weak financial structure that left themvulnerable to an economic downturn. Based on a sample of morethan 850 publicly listed firms in the four crisis countries—Indonesia, Malaysia, the Republic of Korea, and Thailand and—andtwo comparators, Hong Kong (China) and Singapore, it appearsthat firm specific weaknesses already in existence before thecrisis were important factors in the deteriorating performanceof the corporate sector.      

INCOMPLETE MARKETS AND COMMODITY-LINKED FINANCE IN DEVELOPING COUNTRIES

This article provides a framework for appraising new financialinstruments and evaluating the extent to which they can helpalleviate problems of incomplete credit markets and contingentclaims markets in developing countries. Although the issuesinvolved apply to any new financial instrument, we give particularattention to commodity-linked securities because many developingcountries specialize in producing a handful of primary commoditiesand are therefore exposed to substantial commodity price risks.The article looks at the supply of, demand for, and pricingof commodity-linked securities and discusses some issues thataffect their use by developing countries: their special legalstatus as sovereign debt; their feasibility (since to becometruly effective they will require liquid secondary markets);and the construction of an optimal portfolio of external debtobligations. It also discusses the potential for new financialinstruments—particularly commodity-linked securities—asa tool for risk management in developing countries.      

FINANCIAL MARKETS, PUBLIC POLICY, AND THE EAST ASIAN MIRACLE

Many factors contributed to the rapid growth of the economiesof East Asia in the past quarter century. This article examinesone important aspect of that growth—commonly referredto as the "East Asian miracle"—public policies affectingthe financial markets. East Asian governments intervened extensivelyin financial markets at all stages of their development. Whatsets their actions apart from those of other developing countriesthat have not fared as well? We do not have the informationto answer conclusively what effect particular actions had (thatrequires a counterfactual test of what growth would have beenwithout the particular intervention). But we can identify themarket failures the East Asian governments addressed, assesssome of the theoretical reasons why each policy might be growthenhancing, and provide some data attesting to the impacts ofthe policy. Several characteristics of financial sector interventionsin East Asia stand out: they incorporated design features thatimproved the chances of success and reduced opportunities forabuse; interventions that did not work out were dropped unhesitatingly;and policies were adapted to reflect changing economic conditions.      

Developing Countries' Changing Participation in World Trade

Recent years have seen substantial reductions in trade policyand other barriers inhibiting developing country participationin world trade. Lower barriers have contributed to a dramaticshift in the pattern of developing country trade—awayfrom dependence on commodity exports to much greater relianceon manufactures and services. In addition, exports to otherdeveloping countries have become much more important. Thesechanges have profound implications for the role played by developingcountries in the world economy and trade system.      

THE COMMON AGRICULTURAL POLICY: A Review of Its Operation and Effects on Developing Countries

Policy changes in the European Community (EC)—the world'slargest importer and, since 1986, exporter of agricultural commodities—mayhave significant effects on world markets and developing countries.This article investigates the EC's Common Agricultural Policy(CAP), its history, mode of operation, and the prospects andpossibilities for change, to bring out the implications of thepolicy for developing country exporters and importers. The hypothesisthat evolves differs from that of many studies in proposingthat an agricultural liberalization in the EC is unlikely toeffect any great change in world market prices over the firstfew years. Developing countries' principal gain from a liberalizationof the CAP would derive from increased stability of world marketprices, improved access to export markets, and a reduction inthe uncertainty currently caused by discretionary measures inthe EC.      

Principles of Financial Regulation: A Dynamic Portfolio Approach

Economists seeking explanations for the global financial crisisof 1997–99 are reaching consensus that a major factorwas weak financial institutions, which resulted in part frominadequate government regulations. At the same time many developingcountries are struggling with an overregulated financial system—onethat stifles innovation and the flow of credit to new entrepreneursand that can stunt the growth of well-established firms. Inparticular, too many countries are relying excessively on capitaladequacy standards, which are inefficient and sometimes counterproductive.The author argues that financial systems can be reformed successfullyusing a "dynamic portfolio approach" aimed at managing the incentivesand constraints that affect not only financial institutions'exposure to risk but also their ability to cope with it. Thearticle sets out general principles of financial regulationand shows how the dynamic portfolio approach can help countriesdeal with the special problems that arise during the transitionto a more liberalized economy as well as those that arise indealing with a financial crisis similar to the 1997 crisis inEast Asia.      

Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries

Life insurance has become an increasingly important part ofthe financial sector over the past 40 years, providing a rangeof financial services for consumers and becoming a major sourceof investment in the capital market. But what drives the largevariation in life insurance consumption across countries remainsunclear. Using a panel with data aggregated at different frequenciesfor 68 economies in 1961–2000, this article finds thateconomic indicators—such as inflation, income per capita,and banking sector development—and religious and institutionalindicators are the most robust predictors of the use of lifeinsurance. Education, life expectancy, the young dependencyratio, and the size of the social security system appear tohave no robust association with life insurance consumption.The results highlight the importance of price stability andbanking sector development in fully realizing the savings andinvestment functions of life insurance in an economy.     

Managing Oil Price Risk in Developing Countries

This article presents a simple framework for understanding theimpact of oil dependence on growth in terms of an optimal savingsand investment strategy. Among the more important factors underlyingthis strategy is the extent to which oil price changes are temporaryor permanent. This in turn determines whether a country shouldrely on stabilization and savings funds or the use of financialinstruments to manage oil revenues—or both. Country experienceswith stabilization and savings funds are surveyed, and the caseis presented for using financial instrument to manage oil pricerisk. Policy implications for enhancing the use of financialinstruments are explored, including an expanded role for internationalfinancial institutions.      

PRIVATIZATION: LESSONS FROM MARKET ECONOMIES

In the past decade governments all over the world have begunprivatizing state enterprises—indeed, it is becoming quitehard to find a country without a program of privatization underway or at least on the policy agenda. This striking reversalof the push to expand state ownership in the 1960s and 1970sresults from generally poor performance of state enterprisesand a disappointing record of past reform efforts that fellshort of ownership change. This article examines the objectives of privatization and thestrategies for achieving them, documenting recent trends andreviewing the experience with privatizing state-owned commercial,manufacturing, and service enterprises in both competitive andnoncompetitive markets. The authors analyze the various tacticsthat can be or have been employed, in relation to scope, pace,sequencing, and methods of implementation. The evidence showsthat privatization produces benefits of efficiency and innovation—ifdone right. The lessons of experience discussed in the articleoffer guidance on how to realize the promise of privatizationwhile minimizing the risks and costs.      

New Models for Old-Age Security: Experiments, Evidence, and Unanswered Questions

The escalating costs of traditional social security systemsare forcing countries to reevaluate the formal programs thatprovide income maintenance support to the aging. This articlesuggests a reform strategy built around three systems, or "pillars,"to provide old-age security—a public pillar with mandatoa private, mandatory savings plan, and a voluntary savings system.Three variations of this model are being implemented in differentcountries: the Latin American model, in which individual workerschoose an investment manager for their retirement finds; theOECD model, in which employers, union trustees, or both choosethe investment manager for an entire company or occupation;and the Swedish notional account model, a reformed pay-as-you-gofirst pillar that may be supplemented by a second, funded pillar.Preliminary empirical evidence on the efficiency and growtheffects of pension reform, mostly from Chile, indicates thatthe impact on national saving and financial market developmentand, through these, economic growth, has been positive and possiblylarge. Problems concerning high administrative costs and regulationsthat distort investment decisions remain to be resolved, however.