Remittances and vulnerability in developing countries: Results from a new dataset on remittances from Italy
Giulia Bettin, Andrea F Presbitero, Nikola Spatafora 10 February 2014
Remittances are one of the most important financial flows to developing countries – more than three times the level of official development assistance. This column presents recent research on remittance flows from Italy. Their limited volatility and countercyclical behaviour with respect to macroeconomic conditions in the recipient country help mitigate developing countries’ vulnerability to external shocks. Better access to financial services for migrants can foster remittance flows.
Remittances from migrant workers currently represent one of the most important financial flows to developing countries. They can play an important role in pulling millions of families out of poverty. It is therefore critical to identify the key factors affecting remittances, as well as the barriers to these flows (Beck and Martinez Peria 2009 ). In particular, it is important to understand how remittances depend on macroeconomic conditions in the migrants’ host country and country of origin, and how they were affected by the global financial crisis.
Italy, migration, global financial crisis, financial development, Remittances
Finance and growth: Too much of a good thing?
Thorsten Beck 27 October 2013
A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the downside risks can be beneficial.
Over the past 20 years, economists have accumulated a substantial body of empirical evidence that financial sector deepening is a critical part of the economic development process. This shows a well-functioning financial system is a conditio sine qua non for modern market economies to flourish. What started with simple cross-country regressions, as used by King and Levine (1993), has developed into a large literature using an array of different techniques to look beyond correlation and controlling for biases arising from endogeneity and omitted variables.
economic growth, financial development
Migrating out of poverty: The role of finance
Meghana Ayyagari, Thorsten Beck, Mohammad Hoseini 23 June 2013
Financial liberalisation has been controversial among academics and policymakers as it is not clear whom the benefits of expanded credit allocation accrue to. Using time and state-level variation across Indian states, this column finds strong evidence that financial deepening reduces rural poverty, especially among the self-employed. Financial deepening is also found to be associated with an inter-state migration trend from rural areas into the tertiary sector in urban areas.
For better or worse, the 2008 financial crisis has put the financial sector again at the centre of public debate. Several commentators have suggested that financial liberalisation contributed both to the financial crisis and to growing income inequality (e.g. Krugman 2009 and Moss 2009). On a more general level and as in the case of other policy areas associated with the Washington consensus, financial liberalisation has been controversial among academics and policymakers, as it is not clear whom the benefits of expanded credit allocation accrue to.
India, financial development
Interest groups and government capabilities matter for financial development
Eduardo Cavallo, Carlos Scartascini 12 May 2012
For some commentators, the recent financial crises are a sign that financial development has gone too far. Yet there are still countries where such concerns are the stuff of dreams. This column focuses on why the level of financial development in poor countries remains so low and what policymakers can do about it.
The debate on the benefits and limits of financial development has come to the fore with the global financial crisis. The fact that the epicentre of the global financial crisis was in countries with developed credit markets has led some commentators to argue that financial development may have gone too far. However, much less attention has been paid to the fact that financial markets remain underdeveloped in many developing and emerging markets.
Development International finance Politics and economics
institutions, developing countries, emerging markets, financial development
Finance, long-run growth, and economic opportunity
Ross Levine 25 October 2011
Financial systems support and spur economic growth. But does financial innovation foster financial development? While recent innovations have done damage, this column says the long-run story is that financial innovation is essential for economic growth.
Finance is powerful. The financial system can be an engine of economic prosperity – or a destructive cause of economic decline and misery. The impact of the financial system on the rest of the economy depends on how it mobilises savings, allocates those savings, monitors the use of those funds by firms and individuals, pools and diversifies risk, including liquidity risk, and eases the exchange of goods and services.
Financial markets International finance
economic growth, financial development, financial innovation
Sovereign defaults, banks and financial institutions
Nicola Gennaioli, Alberto Martin, Stefano Rossi 17 November 2010
Recent sovereign defaults in developing countries have put severe strain on the defaulting country’s banking system. This column argues that these events teach us how the development of private financial markets plays a critical role in reducing the risk of government default and thus in supporting public borrowing.
Recent sovereign defaults highlight a close link between government default and financial sector turmoil, where banks often take centre stage. In the Russian default of 1998 the government's suspension of debt payments triggered large losses on the balance sheets of Russian banks, which had heavily invested in public bonds. These events, further exacerbated by the devaluation of the rouble, allegedly contributed to cause a financial sector meltdown and a credit crunch. Although particularly severe, the Russian episode is by no means exceptional.
Global crisis International finance
financial development, default, Debt crisis, Fiscal crisis
Can financial sector reform help bring informal firms into the formal sector?
Thorsten Beck, Chen Lin, Yue Ma 13 October 2010
Can financial sector reform help bring informal firms into the formal sector? This column examines over 22,000 firms from 43 countries. Firms in countries with a credit registry are 20% less likely to evade taxes, and the tax evasion ratio in such countries is 11% lower.
While the global crisis has amply demonstrated the economic fragilities that a highly evolved financial sector can create, it is important not to “throw the baby out with the bath water”. The financial sector is critical to the economy. The important connection between financial development and growth is supported by a growing literature (Levine 2005).
taxation, tax evasion, financial development, informal sector
“Mother, can I trust the government?” Stable democracies are more likely to enjoy sustained financial development
Marc Quintyn , Geneviève Verdier 23 September 2010
What do countries need for sustainable financial development? This column argues that protection of property rights is necessary but not sufficient. Using a sample of 160 countries from 1960 to 2005, it finds that checks and balances on power and political stability are the vital ingredients.
The epicentre of the global crisis can be traced to the world’s most developed financial systems, but few would consider this enough to challenge the broad consensus that financial development is good for economic growth. Yet despite this consensus, levels of financial development vary widely across countries (Figure 1), and many governments have failed to jumpstart their country’s financial markets.
Figure 1. Cross-country disparities in the ratio of credit to private sector GDP (2005) (each bar represents a country)
Development Financial markets Politics and economics
democracy, institutions, financial development
The policy roots of finance
Giuseppe Bertola, Anna Lo Prete 20 May 2010
Financial interconnectedness across countries has reached unprecedented levels – but what has driven this change? This column finds that financial deregulation is responsible for 16 percentage points of the increase in financial development, but openness to trade and the size of government off-set one another. This is because the structural association between trade openness and financial development is mildly negative.
Finance boomed for quite some time. And then it crashed. To understand what might happen as the world begins to emerge from the crisis, we need to try and understand where finance came from. At the global level, finance grew along with international economic integration at the turn of this century, as well as at the beginning of the 20th century.
Global economy International finance
financial development, openness, financial deregulation
The crisis and the developing countries
Fabrizio Coricelli 01 May 2010
Why have emerging economies weathered the crisis better than advanced countries? This column summarises a session given by Alan Winters, Saul Estrin, Thorsten Beck, and organised by Nauro Campos at the Royal Economic Society annual conference in March 2010. The contributions argue that the crisis may have long-lasting effects on migration, foreign direct investment, and financial development in Africa.
Economists and policymakers are still debating the causes of the global crisis and the prospects for recovery in the world economy (see the excellent column by Berkmen et al. 2010 on this site). But one point of agreement is that emerging economies have so far have weathered the crisis much better than advanced countries.
Figure 1. GDP growth, 2006-2009 (quarter over same quarter of previous year)
Source: IMF, WEO Update, 2010
Development Global crisis International trade Migration
Africa, developing countries, migration, financial development, global crisis