Finance and growth in Africa: The broken link

While bank liabilities in Sub-Saharan Africa are found to follow (but not lead) economic growth, the link between bank credit and growth is altogether absent.     

Ethnic Fractionalization,Governance and Loan Defaults in Africa

We present a theoretical model of an imperfectly competitive loans market that is suitable for emerging economies in Africa. The model allows for variation in both the level of contract enforcement (the quality of governance) and the degree of market segmentation (the level of ethnic fractionalization). The model predicts a specific form of nonlinearity in the effects of these variables on loan default. Empirical analysis using African panel data for 110 individual banks in 28 countries over 2000–08 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.     

International aspects of public infrastructure investment

Abstract.  Modelling infrastructure as an international public good in a two‐country model of trade where each country's social planner behaves strategically, we show that, in general, the equilibrium levels of infrastructure are not optimal from a global perspective. Utilizing an appropriate econometric framework and data from 16 European countries over the period 1987–95, we find evidence that is consistent with the predictions of our model. JEL Classification: F10, F42, H42
Aspects internationaux de l'investissement public dans les infrastructures.  Les auteurs présentent un modèle de commerce international entre deux pays dans lequel (1) les planificateurs des deux pays ont un comportement stratégique et (2) les infrastructures sont un bien public international. Ils montrent que, en général, les niveaux d'équilibre des investissements en infrastructure ne sont pas optimaux d'un point de vue global. A l'aide d'un cadre économétrique approprié, et de données pour 16 pays européens entre 1987 et 1995, ils valident les prédictions de leur modèle.     

BANKING SECTOR POLICIES AND FINANCIAL DEVELOPMENT IN NEPAL

ABSTRACT This paper examines the interactions between banking sector policies, financial development and economic growth in Nepal employing recently developed time series techniques. Policies such as interest rate controls, directed credit programmes, reserve and liquidity requirements are identified and measured. A summary measure of repressive policies is constructed by the method of principal components. This measure is found to have a statistically significant influence deepening, independently of the real interest rate. We argue that our findings are consistent with the hypothesis of market failure. Exogeneity tests suggest that financial deepening and economic growth are jointly determined. Thus, policies which affect financial deepening may also have an influence on economic growth.     

Why Do African Banks Lend So Little?

We put forward a plausible explanation of African banking sector under‐development in the form of a bad credit market equilibrium. Using an appropriately modified Industrial Organization model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). Applying a dynamic panel estimator to a large sample of African banks, we show that loan defaults are a major factor inhibiting bank lending when institutional quality is low. We also find that once a threshold level of institutional quality has been reached, improvements in the default rate or institutional quality do not matter. This provides support for our theoretical predictions.     

Financial Liberalisation and the South Korean Financial Crisis: An Analysis of Expert Opinion

This paper provides a novel analysis of the South Korean financial crisis drawing on the findings of a unique survey of IMF/World Bank and South Korean experts. The survey reveals that over‐optimism and inadequate recognition of financial risks inadvertently led to excessive risk‐taking by Korean financial intermediaries. It also indicates that the sources of over‐optimistic assessments of East Asian economies were mainly to be found outside East Asia and included the Bretton Woods Institutions themselves, Western media and analysts. In Korea, weaknesses in risk management were the result of (i) lack of expertise in relation to handling the risks associated with capital flows, and (ii) disincentives to manage risks emanating from a relatively successful history of government‐provided safety nets for both industry and banking. Financial liberalisation widened risk‐taking opportunities, by allowing Korean financial institutions to both borrow from and lend to institutions outside Korea. It also created additional disincentives for managing risk by intensifying competition and eroding bank franchise values. Weaknesses in prudential regulation allowed bank portfolios to become riskier, especially in terms of increased liquidity risk as a result of maturity mismatches between dollar‐denominated assets and liabilities. The liquidity crisis, which followed the re‐assessment of the South Korean economy by international lenders in late 1997, triggered a full‐blown financial crisis because of the absence of an effective international lender of last resort.     

Cointegration,error correction and the demand for money in Cyprus

This paper applies the recently developed technique of cointegration to estimate the demand for broad money in the case of Cyprus. Cyprus is an example of a country which does not have a sophisticated financial sector and which faced a severe political shock at a certain point in her history. The hypothesis of instability in the demand for money function cannot be rejected if the effects of this shock are not taken into account. In particular, it is argued that there was a once and for all increase in the income elasticity of this function at the time of the shcock. When this shift is accounted for by the introduction of an appropriate variable in the cointegrating regression the hypothesis of instability in the demand for money is rejected. Two dynamic error correction models are then specified with income and consumption as the scale variables respectively. Non-nested tests are carried out which reveal that consumers' expenditure is a more appropriate scale variable than GDP.     

Intertemporal Output and Employment Effects of Public Infrastructure Capital: Evidence from 12 OECD Economies

This paper utilises an intertemporal optimisation framework to study the effects of public infrastructure capital on output supply and input demands in 12 OECD countries. We find that in all 12 countries: (i) public capital has positive long-run effects on both output supply and input demands (ii) its mean short-run rates of return are fairly low, while the corresponding long-run rates are much higher but declining over time. These findings underscore important under-investment gaps in infrastructure during the 1970s and 1980s; these gaps however narrowed down significantly (in a few cases completely) by the early 1990s.     

One date,one break?

This paper demonstrates that the conventional approach of using official liberalisation dates as the only existing breakdates could lead to inaccurate conclusions as to the effect of the underlying liberalisation policies. It also proposes an alternative paradigm for obtaining more robust estimates of volatility changes around official liberalisation dates and/or other important market events. By focusing on five East Asian emerging markets, all of which liberalised their financial markets in the late, and by using recent advances in the econometrics of structural change, it shows that (i) the detected breakdates in the volatility of stock market returns can be dramatically different to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates can readily entail inaccurate inference. In contrast, the use of data-driven techniques for the detection of multiple structural changes leads to a richer and inevitably more accurate pattern of volatility evolution emerges in comparison with focussing on official liberalisation dates.