the financial systems approach

The Financial Systems Approach

To Development Finance

and Reflections on Its Implementation

by J.D. Von Pischke1

The financial systems approach to development finance gained popularity among some major development assistance agencies in the 1970s and remained a basis for donor intervention through the early 1990s. This approach consists of liberalization or selective decontrol of financial markets. It replaced earlier emphasis on targeting credit use, creating specialized government-owned lenders, and keeping interest rates low.

This paper describes the financial systems approach and devotes considerable attention to the institutional context in which it was formulated and applied, especially in the World Bank, a major advocate of financial systems development. Some of the author's personal adventures are also included. This paper does not attempt to offer a definitive, complete or balanced history of what was a disorderly process. Rather, it is more of an eye-witness account by a credit specialist happily employed as a staff member of the World Bank from 1976 through retirement in 1995.

Reforming Financial Markets to Assist Markets Generally

The financial systems approach to development finance grew out of research and insights from the 1960s and 1970s that focused on the interaction of the financial sector and the other sectors of the economy. Pioneers in this branch of economic thought were Raymond Goldsmith, John Gurley, Edward Shaw and Ronald McKinnon. (See the list of references at the conclusion of this paper for major works of authors cited in the text.) Their early research demonstrated that the financial sectors in developed economies were generally proportionately larger relative to the total economy than the financial sectors in backward economies. More importantly, the experiences of these scholars and of others in Taiwan and South Korea and in reforms elsewhere suggested that policies that had the effect of increasing the size of the financial sector promoted economic growth generally. (The size of the financial sector is measured by the value of financial claims [on issuers] which is identical to the value of financial assets [of holders]).

As this fact was studied, the conclusion emerged that financial sectors of poor economies were too small in the sense of being below an optimum size that would better accelerate the growth of other sectors. The result of this deficiency was that the supply of financial savings held in the form of deposits in domestic financial institutions was probably retarded. Deposits were certainly not efficiently intermediated for investment outside the financial sector. (The case was made effectively that increases in financial savings do not generally occur at the expense of real investment, and that increases in financial savings can increase the supply of real investment, overturning the contrary Keynesian concern.) Integration of the

1 Helpful comments were received from several World Bank and Ohio State University friends who are mentioned in this paper. Comments by Millard Long are attached at the end of the text. This original version of this paper was prepared for the First Annual Seminar on New Development Finance, held at Frankfurt University in September 1997.

Financial Systems 1 January 5, 1998

various sectors was limited by the fragmentation of the financial system, consisting of banks and other institutions acting as financial intermediaries. Money could not play its full economic role because holding it was not a sufficiently attractive alternative, and the evaluation and sharing of risks was suboptimal from a welfare perspective.

Financial Repression and Financial Liberalization

Financial sectors considered as being too small were classified as repressed. The instruments of repression were controls that inhibited financial growth. The most common of these in credit markets were artificially low interest rate ceilings, lack of competition in banking associated with barriers to entry and statutory fragmentation of credit markets that created lots of specialized intermediaries with limited powers, high required reserves that helped fund government budgets at the expense of other potential borrowers, and directed credit programs and credit quotas requiring banks to lend to borrowers or classes of borrowers preferred by the government but shunned by bankers. Subsidies abounded, and in some countries more than half of banks' funds were absorbed by required reserves held at the central bank and by directed credit.

The characteristics of repressed financial markets were broadly anti-developmental. Transaction costs were high and competition was low. This made it difficult to issue small loans profitably, excluding large numbers of potential borrowers. Financial institutions were often not well-run from a business perspective, leading to high arrears and a lack of innovation. Loans were too often provided for projects and technologies that were inappropriate, creating dependency on lenders. An incomplete view of finance led to use of credit where equity or risk capital would have been the appropriate vehicle. This reflected, in particular, insufficient awareness of risk. Rent-seeking dominated politicized lenders and markets for subsidized credit. Other controls also diminished creditworthiness according to commercial standards: taxes on agriculture reduced the repayment capacity of farmers, and protection from imports which raised prices paid by purchasers of local goods.

In equity markets financial repression occurred because of rules requiring that initial public offerings be priced by government committees, forcing listed companies selling additional shares to do so at the par value of outstanding shares rather than at market value, taxes on transactions and on capital gains that discouraged trading, and listing and trading practices and rules, or the lack of them, that favored insiders at the expense of the investing public.

The third branch of financial markets, insurance and guarantees, was generally neglected by financial systems scholars, who concentrated primarily on credit markets and to a limited extent on equity markets. A number of economists, however, held the view that, because of imperfect insurance markets, credit markets were all the more important as targets of developmental intervention. In other words, real risks could not be covered and credit was required to smooth consumption flows. Some of those holding this view appeared to neglect savings as a means employed by individuals, households and firms to deal with risk.

Other signs of financial repression included the lack of interbank markets and the related absence of actively traded benchmark instruments such as short-term government securities that would generate a market-determined reference rate of interest, or at least provide a market response to government efforts to control interest rates or money supply.

The conclusion and developmental recommendation that evolved was that, where inflation is controlled, financial sector development could be a stimulant to


economic growth. The public policy response advocated by proponents was to permit market forces to create deeper financial markets, which occurs when the financial sector grows faster than the rest of the economy. Financial deepening results in a proportionately larger financial sector. Financial deepening could be achieved by reducing or eliminating financial repression. This requires easing or abolishing interest rate controls, lowering restrictions on entry into banking, discontinuing government control of the allocation of credit, and stimulating securities market development. This remedy was termed "financial liberalization."

Financial liberalization also involved a range of complex, related issues such as fiscal stabilization and balance, and controls on foreign exchange and the capital account. The sequencing of financial, fiscal and foreign exchange liberalization caused a great deal of concern on the part of those responsible for "national economic management," a term which also had appeal in that era. Poor sequencing inevitably led to crises. However, the sequencing problem transcends the topic of this paper and is not dealt with further, except to note that it became a major focus of research, while determining the optimal size of the financial sector did not.

The high point in concern for and promotion of the financial systems approach was the World Bank's World Development Report 1989, assembled by a team led by Millard Long. The WDR's introduction provided a succinct statement of the role of finance in development:

A financial system provides services that are essential in a modern economy. The use of a stable, widely accepted medium of exchange reduces the costs of transactions. It facilitates trade and, therefore, specialization in production. Financial assets with attractive yield, liquidity, and risk characteristics encourage saving in financial form. By evaluating alternative investments and by monitoring the activities of borrowers, financial intermediaries increase the efficiency of resource use. Access to a variety of financial instruments enables economic agents to pool, price, and exchange risk. Trade, the efficient use of resources, saving, and risk taking are the cornerstones of a growing economy.

The chapters that followed developed the case for liberalization and documented experiences with repression and with liberalization. A powerful point was that positive real (inflation-adjusted) interest rates in the formal sector were correlated with economic growth. Higher real interest rates, given reasonable macroeconomic stability, tended to be associated with more rapid growth in GDP, and lower rates with slower growth.


The WDR's introduction went on to advise:

Conditions that support the development of a more robust and balanced financial structure will improve the ability of domestic financial systems to contribute to growth. By restoring macroeconomic stability, building better legal, accounting, and regulatory systems, specifying rules for fuller disclosure of information, and levying taxes that do not fall excessively on finance, governments can lay the foundations for smoothly functioning financial systems.

An Idea Whose Time Had Come

By this time, approximately 15 years after the initial major statements in the literature, financial liberalization was a standard part of the World Bank's tool kit. In the interim, major events had provided an urgent context for rethinking financial policy and strategy. Official cartelization of petroleum supplies and the subsequent economic dislocation and sovereign borrowing by developing countries was one. Inflation was another. Most disturbing was the collapse of economic growth rates in a large number of poor countries, which led to the coining of the phrase "the lost decade" of development. Most importantly, central economic planning had run out of breath: policy-based liberalization offered entirely new perspectives and opportunities.

More than 25 countries, rich and poor, had experienced financial crises and responded by rescuing some financial institutions while restructuring or abandoning others. In many of these cases it was clear that fraud and skewed incentive structures had made bad things worse. Many bankers who had already lost their capital because of rapidly changing economic conditions, but who continued operating, took speculative positions in desperate efforts to recoup. If they lost their speculative bet they were still broke but if they won they would obtain a new lease on life. Also, mountains of arrears had accumulated, created by (mis)directed credit, a small but significant portion of it funded by donor agencies. The tendency to ignore or roll over bad debts grew in many countries, especially when the banks were government owned and the illiquid debtors were state-owned enterprises or operating in a "priority sector."

The WDR realistically noted that financial development is a large, complex task, and in the process staked out new areas for donor activity:

Liberating financial institutions from interest rate or credit controls cannot, by itself, ensure that financial systems will develop as intended. The legal and accounting systems of most developing countries cannot adequately support modern financial processes. Legal systems are often outdated, and laws concerning collateral and foreclosure are poorly enforced.... To ensure the stability of the financial system and discourage lenders from fraud, it is equally important for governments to supervise financial markets and institutions. In the past, supervisors have spent too much time checking banks' compliance with directives on credit allocation and too little time inspecting the quality of their loans and the adequacy of their capital.

The timeliness of the 1989 WDR was demonstrated by its popularity. Over 18,000 copies of the report had been distributed by the mid-1990s. This was the largest press run of any World Bank publication, breaking the record held until then by Price Gittinger's Economic Analysis of Agricultural Projects.


Part of the interest in the WDR reflected the movement into structural adjustment lending through which the Bank provided loans to governments willing to undertake fundamental reform. These funds were offered to ease the burdens and dislocations of transition from government direction to reliance on market forces. This controversial instrument was applied to the entire array of public policy having an impact on macroeconomic performance as well as sector adjustment loans involving a single sector, often the financial sector.

Structural adjustment lending was a bold move by the Bank in response to systemic problems encountered in traditional project work and to new opportunities created by the disenchantment with central planning and direct controls. In negotiating credit projects with its developing member country governments, for example, the Bank would struggle to increase controlled interest rates on farm loans by one or two percentage points. This was hard work and not very rewarding. Even if successful the rates that resulted might still be less than the rate of inflation. Or, inflation would increase during the project's disbursement period by several percentage points more than the rate increase so tenaciously contested. (Fixed-rate loans were still the norm in many financial markets.)

Clearly, this sort of activity would not put financial sectors where they ought to be. Therefore, the Bank decided to apply its analytical power and financial clout to public policy directly, rather than attempt to continue to influence it project by project. The alternative would have been to cease lending in instances where public policy did not meet the Bank's standards. Reduction in lending was never a realistic alternative overall, and was applied infrequently, usually to small countries.

Macroeconomists and the Financial Systems Approach

For a time finance as a public policy issue and donor intervention strategy occupied a number of economists in donors agencies who were in the business of national economic management: who wouldn't like to make cabinet-level decisions without having to stand for election? Many of these professionals knew relatively little about how financial institutions operate and had little interest in what might be termed financial culture, which in credit institutions arises from the need to make good loans. The focus of these professionals at times appeared to inhibit or retard financial liberalization or to sacrifice sustainability, as explored in a following section. During this era several other developments occurred that also had an impact on the path taken.

One was the changing of the guard at the intellectual level. Goldsmith's work at Yale did not lead much beyond the inspiration it provided for Gurley, Shaw and McKinnon, all at Stanford. It was regarded as somewhat idiosyncratic and lacking in "rigor." (Insight was no longer sufficient for neoclassical economists.) However, Goldsmith's insights were developed, expanded and applied effectively by Ross Levine at the World Bank in making a strong case for the importance of financial development.

Gurley was reportedly roughed up by the police in an anti-war demonstration during the Vietnam era and lost interest in financial development. He spent his remaining few years before retirement from Stanford working on Marxist economics. Shaw retired at about the time his seminal book, Financial Deepening in Economic Development, appeared in 1973 and never again touched pen to paper. McKinnon continued his quest for the solution to the liberalization sequencing riddle, which required 15 years of scholarly effort that led to his second major book, The Order of Liberalization. Maxwell Fry at the University of Birmingham emerged as the most prolific writer analyzing developments in the literature and supporting and refining the financial systems approach at the macroeconomic level.


However, another dimension of the financial systems approach was developing at the micro level simultaneously with the work of the Stanford pioneers. The intellectual leadership of this movement was funded primarily by the United States Agency for International Development (AID) through a series of contracts with the Department of Agricultural Economics and Rural Sociology at The Ohio State University from the mid-1960s through 1993. (Under the leadership of Claudio Gonzalez-Vega OSU still does financial sector work for AID as part of a consortium.)

The Origins of the Ohio State School

This micro focus was inaugurated by Dale Adams's 1971 article in the American Journal of Agricultural Economics, "Agricultural Credit in Latin America: a Critical Review of External Funding Policy." Adams found features of financial repression at work in donor-supported agricultural credit in South America, and asserted that these thwarted efforts to build credit markets that could effectively serve large numbers of farmers. Similar conclusions had been reached by Robert Vogel and Gonzalez-Vega based on a large research exercise undertaken in Costa Rica, but their findings did not reach such a large audience.

Agricultural development, especially focusing on small farmers, was an important donor priority at that time and into the 1980s. At the peak of this period agriculture projects absorbed between one-quarter and one-third of the World Bank's annual lending and agricultural credit projects accounted for about one-third of the Bank's agricultural lending.

AID responded to criticisms made by Vogel, Gonzalez-Vega, Adams and his colleagues at Ohio State, and others by conducting the massive Spring Review of Small Farmer Credit in 1972 under the leadership of E.B. Rice, then an AID staff member but who shortly afterward joined the Operations Evaluation Department of the World Bank. In country after country, cases cited in the Spring Review's more than 20 volumes exhibited similar patterns of behavior. Much of what was observed appeared by researchers to be dysfunctional or at least working counter to the stated objectives of government programs and donor activities. These objectives were usually more credit to more farmers for productive purposes.

An impartial reader of the Spring Review, including Rice's summary volume, could come to the conclusion that all was not well and that more foreign funding for farm credit was not necessarily in order, at least until major liberalizing reforms were in place. AID, however, interpreted the findings as a signal to proceed at full speed with more farm credit projects. Other donors agreed and did the same.

At the same time, much of what was observed with some dismay by agricultural economists appeared to be working well politically for those in control in many poor countries. One example was the official preference for low rates of interest on agricultural loans on the grounds that this was required for food self-sufficiency, the development of export markets, social justice or equity and also because the poor could not afford rates that would cover lenders' costs. (Policy makers can easily put a good face on a politically-attractive subsidy.) Research demonstrated that low rates attracted the larger farmers and politically aware and powerful, who crowded out the small and the poor in the queue for rationed credit that developed. Gonzalez-Vega's dissertation on the "Iron Law of Interest Rate Restrictions" documented and explained this result. (Shaw and McKinnon were his major professors.) The greater the interest rate subsidy, the more concentrated the distribution of loans and the larger their average size.

An interesting surprise was researchers' discovery that poor people, especially agriculturists, seemed to have much more cash on hand than might be expected. In some places the countryside seemed awash with cash. This led to


concern for the integration of savings behavior and borrowing behavior as opposite ends of the spectrum of intermediation as well as opposite sides of the same coin. Vogel's article, "Savings Mobilization: the Forgotten Half of Rural Finance," suggested a new direction. (As evidence has accumulated, one might raise the forgotten proportion to three-fourths.) Donors were slow to innovate on this side of the market, trusting in policy reform to bolster savings. Besides, how does one fund a savings project, and how much funding would be required? In fact, AID did get involved in savings through support for credit union development, especially in Latin America, where a savings mobilization project focusing on credit unions in the Dominican Republic ran for eight years. This project was designed and implemented by OSU.

Coming of Age

The Ohio State School, as it came to be known, especially outside the US, went through several thematic phases. The first focused on interest rates, a prime concern in Adams's article and a prominent issue in inflation-prone Latin American countries in which AID was active. Subsidized interest rates were the central focus at OSU for several formative years and educated a generation of PhD students. Economists are naturally concerned about prices, so interest rates rather than lending technology were a useful entry point. Early studies demonstrated that the artificially low rates associated with directed credit led to nonperforming loans, willful defaults, less economically productive investments, and weak financial institutions that were not in a position to intermediate efficiently.

In the 1970s OSU also responded to AID's concern for savings and for deposit mobilization. Projects involving graduate students were undertaken in Peru, South Korea and Taiwan.

Transaction costs were the next wave, which also lasted for about one round of dissertations. These costs were relatively high for farmers applying for small loans, leading to concerns about the operational efficiency of farm credit institutions and about incentives to repay loans when their value to borrowers was greatly eroded simply by the effort and expense required to obtain them. Vogel noted that it was more economical to default and avoid having to incur these costs each season a loan was desired. Gonzalez-Vega showed that competitive markets led financial intermediaries to reduce transaction costs overall, and in the process internalize some formerly borne by savers and borrowers.

Interest rates and transaction costs generated sufficient concern among scholars and practitioners to spawn two books that advanced the debate considerably at the microeconomic and institutional levels. The first of these, Rural Financial Markets in Developing Countries: Their Use and Abuse, edited by J.D. Von Pischke, Dale Adams and Gordon Donald, was published in 1983 by Johns Hopkins for the World Bank. It contained 50 chapters, 42 of which were from the literature and eight of which were commissioned. Theoretical pieces were mixed with analyses and case studies. This work's function was largely descriptive, communicating a picture of rural finance that was quite different from prevailing perceptions. Adams coined the term rural financial market, improving upon Von Pischke's concept of rural capital markets. These markets worked as markets could be expected to work and official efforts to manage them were ripe for reform. Poor peasants are rational.

This book grew out of the World Bank's Economic Development Institute (EDI), where the first Rural Finance Projects course was offered in 1976, designed by Walter Schaefer-Kehnert with assistance from Von Pischke. This six-week residential course was repeated annually through the mid-1980s, each involving about 25 practitioners from developing countries. Gittinger, head of agricultural courses at EDI, suggested to Adams, who lectured at these courses, that the materials assembled be elaborated into a book. Gittinger engaged Gordon Donald to assist. Donald, a master


wordsmith, had published a book summarizing the Spring Review. Adams was designated as the senior editor, but having recently received a tenured position at Ohio State he declined on the grounds that that position could mean more for Von Pischke who was at that time in the early years of his career at the World Bank.

A second book followed shortly out of a Symposium on Rural Finance held in Washington in 1981, sponsored by EDI, AID and Ohio State: Undermining Rural Development with Cheap Credit, edited by Dale Adams, Douglas Graham and J.D. Von Pischke. This book was originally intended for publication by the Bank, building on Rural Financial Markets. However, its prescriptive tone, favoring fundamental reform in donor strategy and government policy, made it controversial, as could have been expected. Negotiations with the Bank's editorial subcommittee took about a year and ended in rejection, but with a recommendation that it be published elsewhere if a publisher could be found. Westview Press accommodated in 1984.

The title certainly described the contents but caused a few problems within the Bank and elsewhere. One contributor snorted, "Land Grant English!" in a dig at Ohio State. Literary high ground was regained by the Spanish edition that appeared a few years later: Crédito Agrícola y Desarrollo Rural: La Nueva Visión, edited by Adams, Gonzalez-Vega and Von Pischke. (Another narrow escape occurred much later with Von Pischke was working on a manuscript titled Finance at the Fringe. Adams protested vigorously. Finance at the Frontier was the result.)

A third wave of lesser intensity at Ohio State was an interest in informal finance developed by Adams but which met with less enthusiasm by his colleagues there. Informal finance had been strongly taken up by F.J.A. Bouman at Wageningen Agricultural University in the Netherlands since the early 1970s, generating many interesting research topics.

Beyond Financial Systems

A fourth wave, widely dispersed beyond Ohio State, is the current concern for information and incentives as part of the New Institutional Economics. With this wave, macroeconomists finally caught up with the reality of financial markets, which certainly includes an institutional element. Prior to that the usual sort of article dealt with analyses based on perfect financial markets in which one could buy or sell any quantity of credit at the same price: no intermediaries, infinite debt capacity, one interest rate that clears the market, and risk as a footnote.

Some interesting attempts had been made since the 1960s, however, to explain credit rationing by banks. This helped open the debate that led to the benchmark article by Joseph Stiglitz and Andrew Weiss 1981. The work that followed enabled mainstream macroeconomists, probably for the first time since 1936, to use the tools of their trade to suggest how sound and dynamic financial systems could be promoted. The approach developed by Stiglitz and his followers now dominates thinking about financial development. The New Institutional Economics in which it is anchored can offer interesting insights into the fate of the financial systems approach that occupies the remainder of this paper.

The weakness that still remains among macroeconomists in donor agencies is the temptation to rush in wherever there are perceptions of market failure. As Stiglitz and others have demonstrated, information problems abound (as bankers have known since the first loan was made), as do externalities that cannot be captured by their creators. Therefore, market failure in finance is ubiquitous. However, the construct is hollow and uninformative: those who would intervene to correct market failure that is judged to work against the poor also face information problems. For example, what interest rate should be applied, what information is needed and how can it be gathered, and how should loan size be determined?


Brushing aside these mere technical details, technicians and dreamers with money and power have been able at great cost to impose their values, at least for a time, on those operating in financial markets.

The approach that would seem to be required at the project level is a micro-economic prescription based on information and transaction costs: concentrate on innovation and the costs of designing and delivering a new financial service designed for some developmental purpose. Because innovation consists of doing what has not been done before, there is no market and hence no "market rate" that can be charged at the outset. However, "market rates" continue to be cited as an appropriate benchmark and credit project promoters often claim to be charging such rates. The only appropriate rate is one that will cover the innovator's costs, including the cost of the risk inherent in innovation. Any initiative that claims to be promoting financial market development should be monitored and evaluated in great detail so that future designs are based on the best available information and so that mistakes are made only once. These features alone could transform development assistance in or through financial markets.

Awkward Related Issues

Throughout the 1970s and 1980s there was a lot of curiosity about what came to be known as the informal sector. This term, popularized by the ILO, was in itself something of a victory for enquiry, replacing phrases such as "unorganized sector" which was used in countries that had little official time for, and by economists who had little professional interest in, Smith's invisible hand or Hayek's spontaneous order. Moneylenders are of course one of the most controversial representatives of the informal sector, and they had either to be exorcised or legitimized for financial liberalization at the smaller end of the market to be fully understood and widely endorsed.

The determined early writer who suggested that exploitation was not the primary feature of informal moneylending was Anthony Bottomley. He broadcast his views, based on experiences in India, in many journal articles, which helped to set the stage for debunking the malicious moneylender myth.

The stereotype was largely discredited from two sides. The first was by research, starting in the 1950s with a large survey of informal market interest rates by U Tun Wai of the International Monetary Fund and later by work by Anand Chandavarkar, his colleague. Long also contributed by studies of risk premia in several southeast Asian countries. The second was through a broader understanding of the costs of providing financial services in small denominations in remote or at least inconvenient areas. Jerry Ladman made a very useful contribution by demonstrating that the behavior of transaction costs and the materiality of interest charges brought small borrowers and informal lenders together while also facilitating marriages between large scale formal lenders and large borrowers.

Respect for informal finance was firmly sealed by Bouman and his colleagues at Wageningen and by others inspired by them. Bouman's 1989 book about rural finance in Maharashtra, Small, Short and Unsecured: Informal Rural Finance in India and his earlier articles set the pace, while Financial Landscapes Reconstructed, which he edited with Otto Hospes, and Informal Finance in Low-Income Countries, edited by Dale Adams and Delbert Fitchett, added the finishing touches. Further support came from a large study headed by Prabhu Ghate at the Asian Development Bank.

Much of Bouman's research was directed at what were then called rotating credit associations, which were renamed rotating savings and credit associations in personal correspondence between him and Von Pischke. The acronym, ROSCA, stuck.


Research on all continents made it clear that people of very modest means have developed private, highly sophisticated collective devices to intermediate savings, credit and risk. Moreover, the ROSCA is common all over the world, and not necessarily by adoption or adaptation but by original insight: how else to explain largely identical structures in East Berlin and Moscow before 1989 and in virtually all developing countries? Here was the friendly face of informal finance, people helping people, neighbors reaching out to neighbors, office mates working together, families pooling their resources, with business often conducted at enjoyable social gatherings. And, as a source of consternation or delight, the majority of ROSCA participants are women.

A problem that still festers is the measurement of results of credit at the micro level. Early narrative examples by Adams and Von Pischke illustrated that the fungibility of money makes it difficult to attribute specific results to specific sources of funds. This theme was taken further by Cristina David and Richard Meyer at Ohio State who demonstrated that finding a valid control group to compare with a sample of borrowers was very difficult if not impossible. The control group would have to be eligible for credit but decline to take loans. Recent claims by econometricians and other researchers that it is possible to construct a valid control reflect improved research techniques and have persuaded many observers that impact can be determined in a relatively straightforward manner. Donors and NGOs remain anxious to demonstrate that their support of credit for the poor improves the welfare of the poor.

The Bank Loses Its Will and Its Way with Credit Projects

Ironically, by the time the World Bank trained its attention on financial systems in the 1989 WDR, its implementation of the financial systems approach at the micro level, devoted to building financial institutions, was virtually exhausted. Activities at the public policy level continued, however. Movement away from intervention by the Bank at the institutional level and the funding for financial intermediaries that had accompanied it were brought to a close by the report of the Bank's ad hoc Task Force on Financial Sector Operations, widely known as the Levy Report for its eponymous chairman, Fred Levy, an economist. The Task Force began its work around 1988.

That report placed credit projects in a broad context and advocated liberalization along with regulations that would promote stability. The concern for efficient regulations reflected the financial crises that had occurred in the 1980s, most of which were also massive regulatory failures. New approaches to regulation were also important because of fundamental changes in financial markets. Examples included the rise of the Eurodollar market, new instruments and innovative technology that altered the scale of risks and made supervision and regulation of banks and securities markets quite a different challenge. The Bank responded by devoting considerable attention to regulation and supervision of commercial banks in particular, an effort which gained momentum in the 1990s.

The Levy Report identified instances in which providing money to financial intermediaries would be unlikely to make developmental sense, as when inflation is high, and when interest rates are held low. It held that subsidy was usually destructive in credit markets. The overall effect of the Report's implementation was to increase greatly the transaction costs of World Bank project officers and their division chiefs who designed agricultural and industrial credit projects. This was done by subjecting project documents and analysis to closer oversight and to more searching questions, such as, "If the six previous projects that provided funds to this industrial development bank over a 15 year period were not successful in creating a dynamic institution and a viable industrial sector, why exactly is the proposed


seventh project likely to behave differently?" The Bank's "financial intermediary lending" collapsed.

By some who wanted to move money and who were distressed by seeing an attractive channel blocked, the result of the Levy Report was treated somewhat bitterly as a victory for the Ohio State School. But if a victory, what a hollow one it was. The virtual cessation demonstrated that the Bank lacked the corporate capacity to design a better agricultural or industrial credit project. No other donor moved to fill the gap on a large scale, although the European Bank for Reconstruction and Development and German development assistance agencies did support innovations.

This failure created another irony, mirroring that faced by the WDR. Von Pischke's Finance at the Frontier: Debt Capacity and the Role of Credit in the Private Economy debuted in 1991 to an audience largely devoid of donor agency practitioners in a position to design a better credit project. The specific technical problem targeted in the book, which was to ensure profitable lending to an expanding clientele by development finance intermediaries in poor countries, was made moot by major donors' disaffection with these clients.

However, the argument in Finance at the Frontier was not stated in a way that would seem conventional within the Bank, or the medicine it prescribed was unpalatable. Three anonymous reviewers selected by the Bank's editorial subcommittee returned highly negative comments. One reviewer indicated in one and one-half double-spaced pages that he or she did not believe much if any of what the author had to say. A fourth reviewer subsequently recruited turned out to be from the International Finance Corporation (IFC), the World Bank Group entity that lends and invests directly in the private sector. He or she recommended publication, disclaimed knowledge about credit projects of the type that had been favored by the Bank, and advised that the author was too long-winded and failed to comprehend the damage that bad management alone does in many financial institutions.

Timothy King, head of the Studies Division in EDI that supported preparation of the manuscript, found that the usual channels in the Bank's Publications Department did not have the funds he expected for several manuscripts that were underway in his division. He responded by establishing a new series with other sources of funding, of which Finance at the Frontier was the first to appear.

Intractable Policy Issues

Why did donors leave development banks behind? One reason was that fatigue had set in with respect to policy prescriptions. Several papers on financial sector policy had been reviewed by the Bank's board of executive directors, which consists of somewhat more than 20 representatives, resident in Washington, of the Bank's member countries. These papers promoted financial liberalization. Their tumultuous reviews by the board contrasted sharply with its customary quiet consensus approach to conducting business.

The division that usually developed on financial intermediation lending policy issues was also the most devastating an international development agency could have, with the overwhelming majority of developing country governments registering considerable skepticism about financial liberalization while the US and certain Western European nations were strongly in favor. (The Japanese executive director grew more bold in dissenting as time went on, noting the role of directed credit in Japan's economic miracle and in Korea. This led to more research by the Bank and publication of The East Asian Miracle. Subsequent developments and research by others raise questions about the precise role of directed credit in Japan and Korea and about the efficiency of their financial sectors.)


The governments of rich countries generally prevailed, because voting in the board is proportional to capital subscribed, which is weighted by the size of a member country's economy. A bureaucratic and political response to the enthusiasm of a small, powerful minority and the skepticism of the majority was simply to forget the problem -- at least one financial sector policy document approved by the board in this fractious fashion was quickly relegated to obscurity.

Internal reforms were therefore unlikely and seen as dangerous. An attempt to send a rural finance policy paper to the board in the early 1980s took more than three years and was eventually aborted by management after numerous reviews at different levels and endless rewrites. The previous agricultural credit policy paper published in 1975 was allowed to go out of print.

The Levy Report also met heavy weather at the board but in the end provided the critical mass required for definitive action by management. However, the persistent lack of consensus among policy makers regarding the financial systems approach was once again suggested by the three years that elapsed before an operational directive for the implementation of the decision appeared. By the time the directive came into force the Bank's flagship series of rural credit projects, in India and Mexico, were visibly in deep trouble, as critics had intimated all along. Industrial finance, as documented by Khalid Siraj, a leading practitioner in the Bank, was also a bleak picture generally except in the Asian Tigers. Shaw's observation in his preface that, "The lagging economy is stubbornly poor," appeared vindicated.

However, donor money flows like a river that is more easily damned than dammed. In the early 1990s Rice produced a major report on the World Bank's rural credit projects, spanning the entire history of these operations. In spite of critical previous work in the Operations Evaluation Department (OED) by himself, in collaboration with Gonzalez-Vega as a consultant, and by others, Rice's new major work in OED found that credit projects were not so bad as they had been painted by the Ohio State School and by the Levy Report.

His report was received favorably by most of the Bank's operations staff, who saw his arguments for modest subsidy and limited directed credit in specific situations as a possible prelude to a return to classic credit projects. This would have given the Bank a lending vehicle that could have responded rapidly to Soviet bloc nations' collapsing economies, for example. However, as previous efforts to "do something" had demonstrated, timeliness does not necessarily promote sustainability in finance. This is the central dilemma facing the financial sector approach. Rice expressed the hope that modest subsidy and directed credit could be consistent with financial systems development in the long run.

Rice's report was met with blistering criticism from those associated with the Ohio State School and in the Bank by others who noted, for a start, that it contained no attempt to quantify repayment performance or portfolio quality of the numerous farm loan portfolios throughout the developing world that had been supported by Bank funds. This gap should not be attributed to negligence on the part of the author or OED. Rather, it reflected the absence of a monitoring and evaluation system within the Bank for systematic collection of meaningful data on the financial performance of credit projects. Rice apparently faced lots of data that provided little financial information.

The problems encountered in the Bank were echoed in other aid agencies to different degrees. However, a candid and therefore highly refreshing exception was a publication of the German aid agencies BMZ, GTZ and DSE that appeared in 1987, Rural Finance: Guiding Principles, edited by R.H. Schmidt and Erhard Kropp. They acknowledged the common problems found in rural finance projects and were instrumental in shifting German assistance from agricultural credit.


Another bright spot was the adoption of the financial systems approach by the Inter-American Development Bank. In the early 1980s operations evaluation staff began to apply the principles of the financial systems approach to IDB credit projects in agriculture and industry. Their conclusions were that these projects often performed poorly. An interesting feature of IDB, in contrast to the World Bank, is that the evaluation unit has a representative on the loan committee. This made it possible to challenge the design of new projects going before the committee that did not conform to financial systems approach parameters. After several years of challenges from the evaluation unit, increased concern about the weight of bad credit projects, and research results confirming the financial systems approach, IDB decided to push for liberalizing reforms through projects and policy initiatives. This change was supported heavily by the American member of IDB's board of executive directors and also by the Executive Vice President, an American political appointee.

Debilitating Institutional Factors

The implementation of the financial systems approach suffered from several institutional weaknesses as described above. These included: first, failure to sustain an intellectual crescendo among macroeconomists following the excitement created by the initial statements in the early 1970s, second, political problems at the project level as donor bureaucrats sought to preserve a convenient vehicle for moving money and as political interests in poor countries resisted the loss of control that would result from decentralizing resource allocation decisions to the market through liberalization, and third, eventual institutional fatigue at the World Bank and elsewhere caused in part by lackluster projects, in part by research results confirming the positions of the advocates for liberalization at Ohio State and elsewhere, and in part by the lack of a creative view of alternatives.

What might have been done better? Attempts were made by Ohio State to interest agricultural economists concerned with farm credit in the US and Canada in the international debate, but without much sustained response. The failure to establish a journal devoted to the financial systems approach has been cited, but Ohio State's major task under its contracts with AID was to assist the Agency and its missions in developing countries. A journal and peer-reviewed articles were not necessarily part of this package, and those articles on financial sector development that appeared in a number of top-flight economic journals did not seem to have much impact on donor agencies. The consensus within AID has been that Ohio State performed well under its contracts, providing good advice at the field level and to policy makers.

In any event, the results and policy implications of work done at OSU and elsewhere were very effectively disseminated throughout donor agencies and to the financial sectors and policy makers of many developing countries. Those who remained opposed to liberalization had a clear profile of their enemy. A number of articles generated by writers in developing countries and by the Ohio State School have appeared in Savings and Development. This journal is published by a foundation in Milan, Italy, as part of the social and intellectual outreach of CARIPLO, a huge Italian savings bank. A new major channel of outreach is the Development Finance Net, organized by OSU in 1994 with collaboration from FAO. It is an Internet discussion list that had about 800 subscribers by 1997.

The organization of credit project work in the Bank through the early 1990s also influenced implementation. The major center of effort on financial market research was in the industrial projects part of the Bank, and the minor one was in agricultural projects. Staff members involved on the industrial side were better economists and better bureaucrats than those in agriculture. They were more in tune with the larger development of the economic doctrine of the Bank, especially at the macroeconomic level, and they were more sensitive to the overwhelming


importance accorded the size of the lending program. They ended up controlling the 1989 WDR and the Levy Report. The approach in agriculture was more rambunctious and even earthy, reflecting personalities and corporate culture in that part of the Bank in those days. The two groups were on friendly terms but rarely collaborated on major tasks.


The Financial Systems Approach and Credit Projects

Another interpretation of the denouement of the financial systems approach can be constructed by investigating the extent to which it was in fact applied. While the intellectual stimulation it created among academics and researchers was palpable, was it sufficiently contagious? Were attempts at implementation through the early 1990s ever anything more than a half-hearted or fainthearted approach by bureaucracies that had no particular reason to embrace it enthusiastically? This possibility can be explored by examining the difference between practice and what might be termed the logical conclusion or full development of the financial systems approach. Key aspects are listed below.

The process of dealing in money within an extended time horizon: Intermediation was a focus of practitioners in donor agencies. It was viewed largely as a mechanical process that could be assisted by more efficient management of financial institutions. Valuation would be the larger concept: financial markets determine the value of financial contracts, which inevitably contain risk. As borrowers and lenders seek increased value, this process can produce relentless refinement in techniques of resource allocation and risk management when financial markets are competitive. While operational efficiency was the focus of practitioners, sustainability in the sense of ensuring that financial contracts had positive net present values would be the logical conclusion of entrusting allocation decisions to markets.

Finance as an end or as a means? Promoters of agriculture, small scale industry and other real sector activities were often indifferent to the financial outcomes of their interventions through credit markets. Their emphasis on the returns to investment in productive assets, which would feed nations, employ the poor, modernize the economy, create export capacity, etc., eclipsed concern for the financial strength of credit institutions financing their agenda. Incredibly, the impact of credit projects on the credit institutions themselves, measured by their return on capital or the net present value of project cash flows on their books, was virtually never calculated. As a consequence, broad economic progress, if in fact credit projects contributed to this, could be accompanied by the weakening of the financial system in the first round of activity created by donor-funded credit.

One complicating factor was that most of the credit institutions that retailed donor funds were state-owned, which was felt by some to imply that their financial strength as independent entities was immaterial as long as the state could provide them sufficient subsidies, which were largely viewed as perpetual. In any event, the full costs of donor enthusiasm for credit were never measured and never will be.

There were several defenses offered by those who were not enthralled with the financial systems approach. First, finance is not "real." It consists of accounting entries, debits and credits which cancel out to zero. Hence, to those working from this starting point its contribution to development is at best unclear, at worse nonexistent. Related to this perspective, bad debt losses are merely transfers in national income accounting, having no impact on the size of the economy. Therefore, they were interpreted by some economists engaged in national economic management as having no negative welfare impact. This appears to imply that disregard for contracts is broadly consistent with development.

Others felt that the sacrifice of finance on the altar of productivity was a good trade, with positive welfare consequences. As one of my bosses noted emphatically, "It is economic development, after all!" Their view was that the general increase in wealth created by directed credit would soon outweigh the bad debt losses that are inevitable when bold innovation occurs. Still others saw no alternative ways of dealing with the awful poverty and deprivation they sought to address. Another possibility consistent with this behavior was that practitioners suspected that credit


projects were money losers but that this information could make it more difficult to promote credit projects in the future. In this they were quite perceptive.

One World Bank vice president, protesting the author's enthusiasm for initiating measurement of the financial impact of credit projects on the institutions that implemented them, said in a private conversation, "Men are out of work. Children are starving. Women are used as beasts of burden. Should I really wait ten years for the financial system to get its act together?" The author's response that if this approach is taken the financial system will never be able to get its act together was dismissed as trivial.

However, a very positive development in measuring the performance of lending institutions using donor funds occurred in the Bank in the early 1990s: Jacob Yaron's Subsidy Dependence Index. The SDI indicates the extent to which a financial institution would have to increase its interest rate on loans in order to earn a return equal to the opportunity cost of capital. The SDI was presented as an economic tool useful for public policy formulation rather than primarily as a creative twist on boring accounting or mundane financial analysis. This made it politically correct and hence acceptable within the culture of the Bank.

This useful tool was embraced enthusiastically by credit technicians, researchers and academics, stimulating debate. By the mid-1990s it was frequently cited or applied in reports and articles. But, at the institutional level the Bank blinked. Yaron's proposal, from the agricultural side of the Bank, that the SDI be applied to all of the Bank's client credit institutions was rejected, by the (reorganized) descendants of the industrial side. The rationale was that accounting practice and standards vary from country to country, which could create inaccurate comparisons across projects.

Credit without risk: While risk pervades finance as gravity pervades physics, it was lacking in the financial design of credit projects, even though by 1989 the WDR was very conscious of the role of risk and its management in financial markets. The mechanics of credit project design in agriculture and industry involved constructing cash flow forecasts for the producers of the crops or products that were to be financed. These projections demonstrated how much money would be needed for any given investment. A high proportion of this amount, commonly 80%, was arbitrarily designated as credit financing.

The projected "free cash flow" the borrower would have available from the investment supported by credit to service debt was derived. A judgment was then made about the proportion of this cash flow that could realistically be expected to be returned to the lender. It was often thought that farmers would be unlikely to part with more than one-third of that stream for servicing their debts. The maturity of the loan was set by the number of years that it would take for the debt service payments to pay off the loan with interest. Normal year assumptions were used in agriculture and full use of production capacity was assumed for industrial borrowers once "full development" was reached in project year 3. Financial (domestic market) prices were used for this analysis.

These projections in financial prices were then translated into "shadow" economic values to analyze their economic efficiency. This adjustment neutralized the impact of domestic price distortions, usually by applying a border price (a world market price) to traded outputs or inputs, or specific corrections for non-traded goods for which there is no relevant border price. The outcome of these manipulations turned the free cash flow of the financial projections into a stream of net economic benefits which could be discounted by the opportunity cost of capital to obtain a net present value for the project or which could be translated into an economic rate of return. These economic measures were then subjected to sensitivity testing, usually


by increasing borrowers' production costs by 10 or 20% and decreasing their revenues by similar percentages to obtain risk-adjusted economic indicators.

These sensitivity tests were rarely applied to the underlying unadjusted financial flows which determine a borrower's repayment capacity. This was especially interesting in agriculture where normal years are often an anomaly. The result was loans that were too large to be serviced conveniently by farmers or other entrepreneurs when risks went against them. In other words, credit contracts concocted without concern for risk overvalue future income streams.

No one ever asked, "What is most likely to go wrong in this deal?" The shortest chapter in a World Bank appraisal report was toward the back, titled "Risk." Sometimes a sugar coating was added by combining it with the chapter on benefits, "Benefits and Risks." The major risk mentioned for many credit projects was that the Bank's funds would not disburse as fast as projected. In at least one case risk was claimed to be immaterial because loans to small farmers were fully secured by pledges of land titles. No information was provided about the fate of creditors' efforts to enforce such claims.

Worse, there was nothing in project design that provided guidance about what might be done when risk weighed in. In addition, many of the developing country financial institutions supported by donors had poor financial housekeeping that made it difficult to assess their actual performance. Credit institutions retailing donor funds got stuck with arrears and often had no real strategies or procedures for dealing with this situation effectively, although more lines of credit were generally available from donors to ensure that these lenders could continue lending. Credit contracts generally, or at least with government-owned lenders, were degraded, arguably at some welfare loss. The frequent recurrence of this result contributed to donor fatigue with credit projects.

Breadth of financial systems development: Donors dealt primarily with credit markets, reflecting a widespread view that a shortage of money was a factor that constrained advances in welfare among the small and the poor. Equity markets received much less attention. Notable exceptions included IFC's innovative and exciting capital markets projects that quietly promoted liberalization, helping these markets to "emerge." Another very active supporter of capital market development was AID during the Reagan and Bush administrations.

To some in the Bank in the 1980s, stock markets were the playgrounds of the rich and powerful while shares and their prices were simply a variety of lottery ticket. No simple standards were at hand to distinguish speculation from investment. Except in IFC and in parts of AID, stock markets were not generally perceived as stimulants to entrepreneurship, as creators of employment or as means by which large numbers of people could participate in the creation of financial wealth by direct investment in stocks or indirectly through pension funds and mutual funds.

The structure of insurance markets was almost entirely ignored, with the minor and unrelated exception of actions by UNCTAD's Special Insurance Programme that made these markets less competitive and less efficient in many developing countries for the sake of the New International Economic Order. This was accomplished, in part, by requiring the local incorporation of insurance agencies and the nationalization of reinsurance.

Forays into insurance and guarantees were made by donors. The most notable insurance venture was all-risk crop insurance, promoted by FAO and AID. AID launched pilot operations in three Latin American countries in the early 1980s and envisaged an international reinsurance corporation for that continent. The pilots and research demonstrated that few farmers are willing to pay, and no governments


are willing to charge, the actuarially fair premium which would equate premium and investment income with indemnities over a long period.

AID technicians at the field level made these results known and advised against further experimentation. Their extraordinary response quickly got AID out of the business. Things were more difficult at FAO, where a major paper about the pricing and economics of all-risk crop insurance was suppressed and its existence even subsequently denied by FAO officials. Nonetheless, FAO largely abandoned its efforts in crop insurance, which had a 20-year history.

Credit guarantees became popular at AID in the late 1980s. Occasional speeches and promotional materials indicated that credit guarantee funds were a cheap way of encouraging lenders to take on more risky business. Guarantee corporations and schemes were set up in a number of countries, and call rates were in many cases reported to be in the low single-digit percentages of guarantees outstanding.

Debate continues about the effectiveness of these funds. Little information is available in a form that would enable meaningful analysis. Many guarantee operations appear to have overhead expenses that exceed their investment income, and hence may require subsidies to continue in business. AID commissioned a review of its credit guarantee operations in Africa in the early 1990s, but the researchers from Ohio State were able to pry loose very few meaningful numbers.

Confusion regarding specialization in finance: Following the implementation of the recommendations of the Levy Report, the World Bank wanted no part of directed credit. This led to some interesting efforts to auction funds to banks, but these creative responses never really took hold. One instrument that the Bank might have used but avoided was promotion of the introduction and management of specific specializations in financial markets. Financial markets naturally tend to diversify as they grow, and the analytical skills and approaches used in different types of lending can vary greatly. Airlines are analyzed differently from steel mills, and home mortgages are different from credit card debts. The Bank might have promoted specialization by providing technical assistance and funds to stake new operations, according detailed attention to management of risks. This route was not taken, probably because of the sad history of directed credit, and perhaps because the end use of credit still attracted more concern than lending technology, i.e., how to make a good loan.

The Legacy

What is the legacy of the financial systems approach? Did it spawn new insights into how development works and the role of finance in that process?

The clearest imprint it created appears to be the widespread acceptance of the liberalized financial market model as good public policy, with regulations and controls focused on process rather than results except where results are interpreted as clearly unsatisfactory for the development of a competitive market. This is an important victory, and it is probably self-reinforcing. Global competition in financial markets no doubt stimulated adoption of the financial systems approach because liberalized financial sectors innovate and provide services to more people more cheaply and sustainably than repressed markets can. From this top-down perspective starting with public policy and continuing through globalization, the financial systems approach has carried the day.

The politicians and bureaucrats in poor countries who refuse to go along often do so at high costs. Subsidies continue to be tolerated (what else can many governments do for their citizens?) but are increasingly expected to be transparent,


temporary and capped. Interestingly, there has been no overall summary by the World Bank of its financial sector adjustment lending. McKinnon and Fry offer lessons, however.

Second, the emphasis on financial market development and transaction costs quite probably stimulated enquiry into the role of finance as interpreted by the New Institutional Economics.

Third, a considerable literature was produced, and the flow continues. Around 1970 all of the useful materials available on the development of rural finance, for example, could have been read by a student in about six weeks. Now the reading list on financial market development at the small end can consume an entire quest for a doctorate.

Finally, can the financial systems approach claim paternity for any of the activities now known as microfinance, which in the 1990s have become the dominant thrust of donor agencies in financial markets? The answer is a qualified "Yes."

Interest rates on many micro loans are often more than 50% per year, and there is indeed attention by some programs to working toward full cost recovery as measured by accounting principles generally accepted in Western countries. Attention to transaction costs and the view of interest as income and expense rather than as some sort of economic construct could be traced to the financial systems approach, but the lineage is not entirely clear.

But, many microfinance programs also bear part of the stamp of classic directed credit projects: heavy subsidy, indifference to transparency, relatively little donor attention to risk, financial reporting standards that are often not informative or timely, insufficient procedures to stop the same mistake from being repeated many times. From this bottom-up perspective of project design -- the quest to design a better credit project and to create a better system in donor agencies for designing such projects -- the financial systems approach has always encountered opposition.

The questioning and research associated with the development of the financial systems approach made a lot of information available to a large number of people through workshops, conferences and the rapidly expanding literature. Those participating include consulting firms and NGOs that want to make a difference. Access to information about the financial systems approach may have influenced them as they drew their own conclusions. After all, most of the financial systems approach is simply common sense once it is accepted that risk happens and that prices have consequences beyond the consummation of the immediate trades they govern.

____________________


Comments received from Millard Longtask manager of the World Bank’s 1989 World Development Report

Date: 97-10-01 06:09:56 EDT

JD

Frankly, I do not know where to begin in commenting on your paper. Your paper is interesting and racy and contains plenty of material, but it is far from the complete story. Had I been writing the paper, I would have told a quite different story. Not that mine would have been more "correct" than yours, only I would have had different things in mind, different points to make, would have brought up different examples, would have put in different facts, while forgetting some you put in, etc. Yours is a one-sided history of the last thirty years. Not wrong, not uninteresting, but far from complete. To handle this, I think i would just add a footnote to that effect at the beginning of the paper.

To add what is missing would take a paper as long as the one that is there. So just let me point out a few things: Bill Diamond and the entire effort to build DFCs is hardly mentioned. I do not think I saw a mention of the Capital Markets Department in the IFC which fathered Antoine van Agtmael and the investments in Emerging Markets; I do not see any reference to the efforts to improve supervision by the Bank, Fund, BIS, etc. You underestimate the extent of financial crisis and the importance Mexico and Thailand have had on thinking; you fail to mention the Bank's work on pensions which in the last few years has been very important. You do not mention Siraj's paper in 1993 on the sorry state of the portfolio's of DFCs or the Bank's financial sector policy paper in 1995. You do not mention Ross Levine et al's work on the importance of finance in development. And I could go on and on.

This is not meant as criticism: the history of financial sector thinking and development over the last thirty years, both from the macro and institutional perspective, would probably require a volume, not an article to do it justice. But even a short article could be written if it focused on the highlights. I would say that you have not done that systematically. Rather you tell an idiosyncratic story seem from your perspective. I do not see anything wrong with that, but i think you should say that is what you are doing.

I have another suggestion. Modify the article to be a history of thought and development of rural finance, but set in a broader context of what was going on in general. that would give the reader the framework for much of what you do and do not cover of the larger story.

Please do not think I am being negative. But this was the major feeling I had as I read the paper.

Millard

(Author’s note: Some changes have been made in the introductory paragraphs to indicate the personal nature of these observations, and to note Ross Levine’s work in passing.)


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