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The Competitiveness Challenge for Secondary Capitals
Robert Cull, Maria Soledad Martinez Peria and Jeanne Verrier
This chapter presents recent trends in government and foreign bank ownership across countries and summarizes the evidence regarding the implications of bank ownership structure for bank performance and competition, financial stability, and access to finance. The empirical evidence reviewed suggests that foreign-owned banks tend to be more efficient than domestic banks in developing countries, promote competition in host banking sectors, and help stabilize credit when host countries face idiosyncratic shocks. But there are trade-offs, since foreign-owned banks can also transmit external shocks and might not always contribute to expanding access to credit. The record on the impact of government bank ownership suggests few benefits, especially for developing countries. While government-owned banks can help stabilize credit growth during crises, they have a negative impact on competition and performance and provide no clear benefits when it comes to expanding access to credit. In contrast, government bank ownership can lead to resource misallocation, since government-owned banks are prone to engage in political lending.
Randall Morck and Bernard Yeung
Japan, an isolated, backward country in the 1860s, industrialized rapidly to become a major industrial power by the 1930s. South Korea, among the world’s poorest countries in the 1960s, joined the ranks of First World economies in little over a single generation. China now seems poised to follow a similar trajectory. All three cases highlight the importance of marginalized traditional elites, intensive early investment in education, a degree of economic openness, free markets, equity financing, early-stage coordination of firms in diverse industries via arrangements such as business groups, and political institutions capable of curbing the power of families grown wealthy in early-stage rapid development to make way for prosperity sustained by efficient resource allocation to high-productivity firms.
Thomas Lambert and Paolo Volpin
This chapter surveys the literature on the political economy of finance. This field offers three main insights. First, it highlights the importance of the role of political institutions in financial development. Second, it shows how the distribution of political power in society drives the prevailing set of contracting institutions and affects capital allocation and access to finance in developed and developing economies. Third, it argues that recognizing the endogenous nature of political institutions is crucial for our understanding of the evolution and functioning of financial systems.