finance and economic development: known knowns, … · finance and economic development: known...
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U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T
MULTI-YEAR EXPERT MEETING ON TRADE, SERVICES AND DEVELOPMENT Geneva, 11–13 May 2015
FINANCE AND ECONOMIC DEVELOPMENT:KNOWN KNOWNS, KNOWN UNKNOWNS,
AND UNKNOWN UNKNOWNSSESSION 3
Mr. Ugo Panizza Professor of Economics and Department
Head, Pictet Chair in Finance and DevelopmentThe Graduate Institute of International and Development Studies
Switzerland
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Finance and Economic Development
Ugo Panizza
MULTI-YEAR EXPERT MEETING ON TRADE, SERVICES AND DEVELOPMENT THIRD SESSION, UNCTAD 11-13 May 201
Known Knowns, Known Unknowns, and Unknown Unknowns
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Background readings
• J.L. Arcand E. Berkes & U. Panizza (2015) “Too Much Finance?” Journal of Economic Growth
• U. Panizza (2014) “Financial Development and Economic Growth: Known Knowns, Known Unknowns, and Unknown Unknowns, Revue d.économie du
• U. Panizza (2012) “Finance and Economic Development,” International Development Policy
• E. Levy-Yeyati, A. Micco & U. Panizza (2004) A Reappraisal of State-Owned Banks, Economia
• E. Fernandez-Arias, R. Hausmann, and U. Panizza (2015) “Smart Development Banks” mimeo
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Outline
• Known Knowns – The traditional literature – The new literature – The new-new literature
• Known Unknowns • Unknown Unknowns
– Two types of banks, two views
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Known Knowns (1)
• The traditional literature – Goldsmith (1969) – King and Levine (1993) – Beck, Levine, and Loayza (2000) – Levine, Loayza, and Beck (2000) – Rajan and Zingales (1998)
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Known Knowns (2)
• The new literature – Rousseau and Wachtel (2011) – Arcand, Berkes, and Panizza (2012) – Beck et al. (2012)
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Vanishing Effect (panel data)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1960-95 1960-00 1960-05 1960-10
dGRO
WTH
/dFD
Not statistically significant
Source: Arcand et al. (2012)
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Too much finance? -2
0-1
00
10dG
R/d
PC
0 .5 1 1.5 2 2.5Credit to Private Sector/GDP
Source: Arcand et al. (2012)
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Who gets the credit?
ARG
AUS
AUT
BEL
BGR
CAN
CRI
CZE
DEN
EGY
EST
FIN
FRA
DEU
GRC
HUN
ISL
IND IDN
IRL
JAM
JAP
KNY
KOR
LTV LTH
MKD
MYS
MEX
NLD
NZL
PAK POL
PRT
RUS
SVK SLV
SAF SWE
CHE
THL
TUR
GBR
USA
URY
0 .2
.4
.6
.8
1
1.2
1.4
1.6
1.8
Cre
dit t
o th
e pr
ivat
e se
ctor
(%G
DP)
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1 Share of household credit
𝑷𝑷𝑷𝑷 = 𝟎𝟎.𝟑𝟑𝟑𝟑 + 𝟎𝟎.𝟔𝟔𝟔𝟔 × 𝑷𝑷𝑷𝑷(𝟐𝟐.𝟎𝟎𝟎𝟎) (𝟏𝟏.𝟖𝟖𝟑𝟑)
𝑹𝑹𝟐𝟐 = 𝟎𝟎.𝟎𝟎𝟕𝟕
Source: Own elaborations based on data from Beck et al. (2012)
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Known Knowns (3)
• The new-new literature – Laeven et al. (2013) – Beck et al. (2013) – Kneer (2013)
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Known Unknowns • Causality
– Some problems with cross-country exercises – Industry (or firm)-level exercise only allow for relative
statements • Measurement & Channels • Dark side of finance
– Crises – Allocation of talent – Politics – Types of credit
• Firm-level data – But with general equilibrium considerations
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Unknown Unknowns
It's not what you don't know that kills you, it's what you know for sure that ain't true Attributed to Mark Twain
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014
2842
5670
1970 1980 1990 2000 2010YEAR
All Countries
014
2842
5670
1970 1980 1990 2000 2010YEAR
Advanced Economies
014
2842
5670
1970 1980 1990 2000 2010YEAR
LAC0
1428
4256
70
1970 1980 1990 2000 2010YEAR
Other Developing Countries
% o
f Ban
k A
sset
s
Government Ownership of Banks
Unknown Unknowns
• State-owned banks remain important • But the profession does not love them • "state ownership tends to stunt financial
sector development, thereby contributing to slower growth" (World Bank, 2001)
• What do the data say? • Are the profession's views internally
consistent?
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State-Owned Banks The evidence
• At the cross-country-level, there is a negative correlation between the presence of state-owned banks and each of financial development and economic growth, but they are less procyclical than private banks – La Porta, Lopez de Silanes, and Shleifer (2002); Micco and
Panizza (2006) • State-owned banks are less profitable than private
banks – Micco, Panizza, and Yanez (2007)
• State-owned banks engage into political lending – Micco, Panizza, and Yanez (2007)
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State-Owned Banks The evidence
• No evidence of a causal relationship between state-ownership and development outcomes – Levy Yeyati, Micco, and Panizza (2008)
• A state-owned bank which is as profitable as a private bank is probably useless – De la Torre et al. (2007)
• Political lending is indeed a problem
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A different-type of state-owned bank, similar empirical evidence
• The World Bank (IBRD) – Does it have an effect on economic growth?
• We don’t know!
– Is it as profitable as Goldman Sachs? • We don’t care!
– Does it engage into political lending? • YES it does! (Dreher et al., 2009, 2013)
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A different-type of state-owned bank, similar empirical evidence
• Erwin Blumenthal (early 1980s) – There is not any – I repeat any –chance on the horizon that
the numerous creditors of Zaire will recoup their funds • (Ndikumana and Boyce, 2011)
• Ronald Reagan (1986) – Cooperation between the United States and Zaire under
President Mobutu's leadership stretches back through 20 years … Mobutu and his people face a heavy foreign debt burden. We have encouraged Zaire to hold firm to the responsible, economic reforms it is attempting, while promising to do our best to ease the way
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…and money kept flowing
Zaire: Net Financial Flows and External Debt to GDP Ratio
-50
0
50
100
150
200
250
300
350
400
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Mill
ion
Cur
rent
USD
0
20
40
60
80
100
120
140
per c
ent o
f GD
P
Other net flowsMultilateral net flowsBilateral net flowsExternal debt stocks (right axis)
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A different-type of state-owned bank, different evaluation criteria
• The consensus on how state-owned development banks should operate (Gutierrez et al., 2011) – Target well-identified market gaps – Do not crowd out the private sector
• MDBs that lend to counties target a well-identified market failure associated with credit constraints generated by lack of enforceability of sovereign debt contracts – Panizza, Sturzenegger, and Zettelmeyer (2008)
• But do MDBs lend to credit constrained countries?
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Do MDBs lend to credit constrained countries?
Mexico 10%
China 10%
Turkey 9%
India 9%
Indonesia 8% Brazil
7%
Colombia 6%
Argentina 4%
Romania 3%
Ukraine 2%
Remaining 57 countries
32%
Composition of IBRD outstanding loans (2011)
Total outstanding loans: approximately USD130 billion to 67 borrowers
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World Bank and China
• Why does the World Bank lend to China? – Cross-subsidization
• Why does China borrow from the World Bank? – Political power – Knowledge transfer – But, why should knowledge transfer be bundled
with lending? – How does the World Bank get the knowledge?
• Fernandez-Arias, Hausmann, and Panizza (2014)
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Finance and Economic Development
Ugo Panizza
Known Knowns, Known Unknowns, and Unknown Unknowns