Since the 1970s, the world has embarked on a new financial globalization era. Cross-country capital flows have significantly increased in developed and developing countries. However, the characteristics of financial globalization differ from what was originally expected. Various examples illustrate this point. Although the literature predicted large gains from financial globalization (such as additional funding, broad diversification, and deeper financial systems), the positive effects have been more limited. In developed and developing countries, financial globalization has manifested in increasing gross capital flows (inflows and outflows) rather than larger net flows. Capital markets are segmented and only a few large firms access international markets. International institutional investors do not seem to have played a stabilizing role, helping to exacerbate and transmit crises across countries. Although financial globalization has brought several beneficial changes, its net effects and spillovers to the overall economies participating in it have yet to be understood.
Facundo Abraham and Sergio L. Schmukler
Franklin Allen, Xian Gu and Oskar Kowalewski
Financial intermediaries and markets can alleviate market frictions through producing information and risk sharing in different ways. In practice, the structure of financial systems can be bank-based or market-based, varying across countries. The influence of financial structure on economic growth is dependent on the overall development of the real economy and institutions. The association is also different during crisis periods and non-crisis periods. Market-based systems tend to have an advantage for financially dependent industries in good times but are a disadvantage in bad times. The recent rapid growth of shadow banking benefits economic growth but also poses additional risks to the financial system and real economy.
Carsten Burhop, Timothy W. Guinnane and Richard Tilly
Germany’s industrialization started long after Britain’s, and Alexander Gerschenkron famously attributed to Germany’s banks a causal role in the rapid growth that followed. The German financial system was also more heavily bank based than the US or UK systems. For these and other reasons, the German financial system has long played a central role in discussions of finance and economic growth. This chapter traces the development of that system from the early nineteenth century to World War I. Germany’s political fragmentation, along with competition among the several pre-1871 states, helped shaped policy toward note-issuing banks in ways unlike the Anglo-Saxon countries. Several different types of banking institutions emerged, each with distinctive balance sheets, products, and clienteles. In additional to several different types of commercial banks, Germany also saw the development of savings banks as well as credit cooperatives aimed at small farmers and urban artisans. The famous, large universal banks that emerged in the later nineteenth century, indeed played a role in underwriting securities, but their role in corporate governance is less clear. German financial development suggests the drawbacks to classifying financial systems as either bank based or market based; the universal banks could only underwrite securities because Germany had developed active markets for corporate issue.
Meghana Ayyagari, Asli Demirgüç-Kunt and Vojislav Maksimovic
This chapter takes stock of the empirical evidence on the financing challenges faced by small and medium-sized enterprises (SMEs) especially in developing countries. We first discuss the institutional constraints that impede access to finance, including the lack of reliable credit information, lack of suitable collateral, and weak legal institutions. We next highlight firm heterogeneity amongst SMEs in accessing finance. We focus on the different policies and reforms that have been shown to be effective in improving access to credit for SMEs and conclude by highlighting areas where new research could be more effective.
Edited by Thorsten Beck and Ross Levine
Asli Demirgüç-Kunt, Leora Klapper and Dorothe Singer
This chapter provides an overview of financial inclusion around the world and discusses the empirical evidence on how the use of formal financial services especially among the under-served, can contribute to inclusive growth and economic development. The empirical evidence reviewed suggests that financial inclusion improves the efficiency and safety of routine transactions while helping people increase savings and consumption and manage financial risks. Yet not all financial products are equally effective in reaching economic development goals such as reducing poverty and inequality. Current evidence suggests that that the biggest impacts come from savings accounts and digital payments, while the impact of credit is mixed. There is some evidence that insurance helps people invest in riskier but more lucrative products and technologies. Empirical evidence on the link between access to financial services and changes in behavior comes primarily from the microeconomics literature that in recent years has expanded to address methodological challenges to identifying the impact of financial inclusion. More work is needed, however, to better understand the relationship between greater financial inclusion and macroeconomic growth.