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The Financial

2010
Development Report
World Economic Forum World Economic Forum USA Inc.
Geneva, Switzerland New York, USA

The Financial Development


Report 2010
The terms country and nation as used in World Economic Forum USA Inc.
this report do not in all cases refer to a
territorial entity that is a state as understood Copyright © 2010
by international law and practice. The terms by the World Economic Forum USA Inc.
cover well-defined, geographically self-
contained economic areas that may not All rights reserved. No reproduction, copy or
be states but for which statistical data are transmission of this publication may be made
maintained on a separate and independent without written permission.
basis.
No paragraph of this publication may be
reproduced, stored in a retrieval system, or
transmitted, in any form or by any means,
electronic, mechanical, photocopying, or
otherwise without the prior permission of
the World Economic Forum.

ISBN-10: 92-95044-93-2
ISBN-13: 978-92-95044-93-7

This book is printed on paper suitable for


recycling and made from fully managed and
sustained forest sources.

A catalogue record for this book is available


from the British Library.

A catalogue record for this book is available


from the Library of Congress.
Contents

Contributors v Part 2: Country/Economy Profiles 57


How to Read the Country/Economy Profiles ..............................59
Academic Advisors vii List of Countries/Economies ........................................................61
Country/Economy Profiles............................................................62

Preface ix
by Klaus Schwab

Foreword xi
Part 3: Data Tables 291
by Kevin Steinberg
How to Read the Data Tables ....................................................293
Index of Data Tables ...................................................................295
Executive Summary xiii Data Tables .................................................................................297

Technical Notes and Sources 369


Part 1: Findings from the Financial 1
Development Index 2010 About the Authors 379

1.1: The Financial Development Index 2010: 3 Partner Institutes 381


Unifying the Narratives of Reform
by James Bilodeau and Ibiye Harry

1.2: Financial Development, Capital Flows, 31


and Capital Controls
by Howard Davies and Michael Drexler

1.3: SME Finance: What Have We Learned 49


and What Do We Need to Learn?
by Thorsten Beck
Contributors
Contributors

EDITOR EXPERT COMMITTEE*

James Bilodeau Chris Coles


Associate Director and Head of Emerging Markets Finance Partner, Actis
World Economic Forum USA
Howard Davies
Managing Director, The London School of Economics and
PROJECT TEAM Political Science
Ibiye Harry Michael Drexler
Project Manager, World Economic Forum USA Global Head of Strategy, Commercial Investment Banking and
Wealth Management, Barclays
Lawrence Chuang
Associate, World Economic Forum USA Nick O’Donohoe
Global Head of Research, JPMorgan Chase
PROJECT ADVISORS Gerard Lyons
Chief Economist and Group Head of Research,
Margareta Drzeniek Hanouz
Standard Chartered
Director, Senior Economist
World Economic Forum Raghuram Rajan
Professor of Finance, University of Chicago
Thierry Geiger
Associate Director, Economist Nouriel Roubini
World Economic Forum Professor of Economics and International Business,
New York University and Chairman, Roubini Global Economics v
CONTRIBUTORS Andrei Sharonov
Managing Director, Troika Dialog
Thorsten Beck
Professor of Economics and Chairman of the European Kevin Steinberg
Banking Center, Tilburg University Chief Operating Officer, World Economic Forum USA

Howard Davies Augusto de la Torre


Managing Director, The London School of Economics and Chief Economist for Latin America and the Caribbean,
Political Science The World Bank

Michael Drexler
Global Head of Strategy, Commercial Investment Banking and
We would like to thank Dealogic and Thomson Reuters for their
Wealth Management, Barclays
generous contribution of data for this Report.

FROM THE WORLD ECONOMIC FORUM

Centre for Global Competitiveness and Performance


Kevin Steinberg, Chief Operating Officer, World Economic Forum
Jennifer Blanke, Director, Lead Economist, Head of the Centre
USA†
for Global Competitiveness and Performance
Max von Bismarck, Director and Head of Investors Industry†
Irene Mia, Director, Senior Economist
Giancarlo Bruno, Director and Head of Financial Services
Ciara Browne, Associate Director
Industry†
Pearl Samandari, Community Manager
Anuradha Gurung, Associate Director†
Roberto Crotti, Junior Quantitative Economist
Trudy Di Pippo, Associate Director†
Abel Lee, Associate Director†
Kerry Wellman, Senior Community Manager†
We thank Hope Steele for her superb editing work and
Lisa Donegan, Community Manager†
Neil Weinberg for his excellent graphic design and layout.
Irwin Mendelssohn, Community Manager†
We would also like to thank Chris Ryan for his assistance in
Tom Watson, Project Manager†
assembling data for this Report.
Isabella Reuttner, Project Manager†
Nadia Guillot, Senior Coordinator
Alexandra Hawes, Coordinator†
Takae Ishizuka, Coordinator†
Elisabeth Bremer, Coordinator†

* The Forum is grateful for the support of the Industry Partners who served on the Expert Committee. Any findings contained in the Report are
solely the view of the Report’s authors and do not reflect the opinions of the Expert Committee members.
† Employees of the World Economic Forum USA.
Academic Advisors
Academic Advisors

Martin Baily
Brookings Institution

Thorsten Beck
Tilburg University

Richard Cooper
Harvard University

Erik Feyen
The World Bank

Luc Laeven
International Monetary Fund

Subir Lall
International Monetary Fund

Maria Soledad Martinez Peria


The World Bank

Sergio Schmukler
The World Bank

Luigi Zingales
University of Chicago
vii

The Forum is grateful for the support of the Academic Advisors who contributed to the Report. Any findings contained in the Report are
solely the views of the Report’s authors and do not reflect the opinions of the Academic Advisors.
Preface
Preface
KLAUS SCHWAB
Executive Chairman, World Economic Forum

When the Forum’s first Financial Development Report to focus priorities on the most-needed areas of financial
was published in 2008, the world was in the midst of reform.
a financial crisis that posed one of the single greatest In the tradition of the Forum’s multi-stakeholder
threats to global prosperity we had seen in over 70 approach to global issues, the creation of this Report
years. Two years later, with the publication of this third involved an extended program of outreach and dialogue
edition of The Financial Development Report, the global with members of the academic community, public fig-
community can look back with an appreciation that ures, representatives of nongovernmental organizations,
concerted global action may have averted the worst of and business leaders from across the world. This work
an immediate crisis. This work is far from complete, included numerous interviews and collaborative sessions
however, and the immediate dangers of financial insta- to discuss the findings, and their implications, of the
bility are still present. Perhaps the most immediate con- Index as well as possible modifications to its design.
cern is that many developed economies must confront Other complementary publications from the World
severe fiscal constraints without jeopardizing a fragile Economic Forum include The Global Competitiveness
economic recovery. Report, The Global Enabling Trade Report, The Global
The financial risks confronting the global economy Gender Gap Report, The Global Information Technology
are both broader in scope and longer in term than just Report, and The Travel & Tourism Competitiveness Report.
those stemming from the recent crisis. The robust We would like to express our gratitude to our ix
growth and relative stability of emerging market industry partners and the academic experts who served
economies have been bright spots shining through on the project’s Expert Committee: Chris Coles,
the turmoil of recent years. It is expected that the Partner, Actis; Michael Drexler, Global Head of
global economy will rely on these economies to be Strategy, Commercial Investment Banking and Wealth
the primary engine of global economic growth in the Management, Barclays; Nick O’Donohoe, Global
years ahead. Yet these economies in turn must rely on Head of Research, JPMorgan Chase; Howard Davies,
financial systems that, in many instances, are less devel- Managing Director, London School of Economics;
oped. It is imperative that development areas within Gerard Lyons, Chief Economist and Group Head of
these financial systems be addressed to ensure that Research, Standard Chartered; Professor Raghuram
future economic growth is not undermined: new Rajan, University of Chicago; Andrei Sharonov,
sources of long-term capital must be tapped to fund Managing Director, Troika Dialog; Kevin Steinberg,
much-needed infrastructure; local capital markets must Chief Operating Officer, World Economic Forum USA;
be developed to meet the expanding credit needs of and Augusto de la Torre, Chief Economist for Latin
all economic sectors; and access to retail financial ser- America and the Caribbean, The World Bank. We are
vices must be extended to help stimulate consumer appreciative of our other academic advisors who gener-
demand in these markets, which in turn can offset ously contributed their time and ideas in helping shape
global imbalances. this Report. We would also like to thank James Bilodeau
The aftermath of the financial crisis has brought a at the World Economic Forum USA, editor of the
ferment of ideas about how to respond to the crisis and Report, for his energy and commitment to the project, as
establish new models for financial systems going for- well as the other members of the project team, includ-
ward. The Forum itself has hosted much of this dialogue ing Ibiye Harry and Lawrence Chuang. We are grateful
through its various stakeholder communities, its regional to Margareta Drzeniek Hanouz and Thierry Geiger for
and annual events, and its Network of Global Agenda their guidance as Project Advisors. Appreciation also
Councils. While it is important that these ideas be heard goes to the Centre for Global Competitiveness and
and vetted, it is also increasingly important that stake- Performance Team, including Jennifer Blanke, Ciara
holders move to unite around a coordinated reform Browne, Roberto Crotti, Irene Mia, and Pearl Samandari.
agenda that addresses all of the financial risks that could Finally, we would like to thank our network of Partner
threaten long-term economic growth. It is in this spirit Institutes, without whose enthusiasm and hard work the
that we offer this year’s Financial Development Report, as a annual administration of the Executive Opinion Survey
comprehensive yet accessible reference tool with which and this Report would not be possible.
Foreword
Foreword
KEVIN STEINBERG
Chief Operating Officer, World Economic Forum USA

The World Economic Forum is pleased to release The basic financial services—such as loans, savings accounts,
Financial Development Report 2010, the third edition and insurance to consumers—is one of its most impor-
since its inaugural publication in 2008. Initiatives such as tant functions. A number of measures with which to
this Report aim to enrich and focus the dialogue, among assess progress in the provision of retail financial services
multiple global stakeholders, that the Forum has pro- are provided within the Report.
moted through its events, Global Agenda Council
Network, and Industry Partnership Programme. The
Report represents a key ongoing initiative undertaken as The Financial Development Report 2010
part of the Forum’s Industry Partnership Programme. In light of the ongoing richness of debate, we offer this
The Programme provides a platform for CEOs and year’s Report as a way to unify these different narratives
senior executives to collaborate with their peers and and enable stakeholders to collectively prioritize, imple-
an extended community of academics, leaders from ment, and assess reforms. Part 1 of the Report summa-
government, and experts from civil society to tackle rizes this year’s Index results and related findings in
key issues of concern to the global community. three sections. Chapter 1.1 outlines the methodology for
the Index, the academic theory and assumptions sup-
porting it, and some of the key findings from the Index
Unifying the narratives of reform results. Chapter 1.2 provides an example of how the
xi
Financial reform continues to occupy a central place on Index can be used to help countries prioritize reform
the global agenda. In some respects, because the urgency efforts, focusing on the development of defenses against
of the response to the immediate financial crisis has volatile capital flows and a code of practice for use of
moderated, there is now more room for debate about capital controls. Chapter 1.3 highlights the issue of
priorities for long-term reform and preferred models for small- and medium-sized enterprise (SME) finance, an
financial development in the years to come. We believe example of a critical issue that must be included within
this Financial Development Report provides an important an expanded narrative of reform that addresses financial
tool with which to ground this debate in actual meas- development more broadly.
ures of progress at the country level. We encourage readers to delve into the detail of
At the global level, while progress has been made in Part 2: Country/Economy Profiles and Part 3: Data
many areas—such as the new capital requirements under Tables of the Report. The richness and breadth of the
Basel III—many questions remain in areas such as coun- data paint a balanced picture of the challenges and
tercyclical capital buffers and the best way to treat system- opportunities faced by different countries.
ically important institutions. Even as multilateral rules By design, this Report must rely on data that are
are drafted and agreed upon, it is vital that institutional available for all the economies it covers, to proxy for key
reform at the country level be undertaken to ensure that elements of financial development. This year, as every
new rules can be enforced and regulatory arbitrage pre- year, it is with a degree of humility that we put forth
vented. The variables in this Report help provide guid- our findings given some of the inherent limitations of
ance on measuring progress at the country level. these data, the rapidly changing environment, and the
As reforms are proposed and some enacted, there is unique circumstances of some the economies covered.
a diversity of opinion around how they may affect the Yet, in the Report’s attempt to establish a comprehensive
availability and cost of capital and how this impact could framework and a means for benchmarking, we feel it
affect economic growth. The business environment in provides a useful common vantage point to unify prior-
different economies, including the tax regime, avail- ities and frame action. We welcome your feedback and
ability of talent, and cost of doing business, could also suggestions for how we may develop and utilize this
impinge on the availability of capital. This Report includes Report to promote the potential of financial systems as
assessments of the business environment and availability enablers of growth and individual prosperity.
of different forms of capital for corporate end-users. On behalf of the World Economic Forum, we
The G-20 and various multilateral organizations wish to particularly thank the members of the Expert
have identified financial inclusion as a central issue on Committee, the Academic Advisors, and James Bilodeau
their agenda. The ability of a financial system to provide and Ibiye Harry for their boundless support.
Executive Summary
Executive Summary

The Financial Development Report 2010 and the Financial Table 1: Top 10 in overall Index ranking
Development Index (FDI) on which it is based provide
a score and rank for 57 of the world’s leading financial 2010 2009 2010 Change
rank rank score in score
systems and capital markets. They analyze the drivers of Economy (1 to 57) (1 to 55) (1 to 7) (2010 vs. 2009)

financial system development that support economic United States 1 3 5.12 –0.01
growth in advanced and emerging economies to serve as United Kingdom 2 1 5.06 –0.22
Hong Kong SAR 3 5 5.04 +0.06
a tool for countries to benchmark themselves and prior-
Singapore 4 4 5.03 +0.01
itize areas for reform.
Australia 5 2 5.01 –0.12
The Report defines financial development as the factors, Canada 6 6 4.98 +0.02
policies, and institutions that lead to effective financial interme- Netherlands 7 8 4.73 –0.12
diation and markets, as well as deep and broad access to capital Switzerland 8 7 4.71 –0.21
and financial services. In accordance with this definition, Japan 9 9 4.67 +0.03
Belgium 10 13 4.65 +0.15
measures of financial development are captured across
seven pillars:

1. Institutional environment
2. Business environment the Netherlands (7th), Switzerland (8th), and Belgium xiii
3. Financial stability (10th). Both Canada (6th) and Japan (9th) maintained
4. Banking financial services their overall rank from last year.
5. Non-banking financial services An important finding from this year’s Index results
6. Financial markets can be seen in the context of the current economic
7. Financial access environment: emerging market economies are now the
primary driver of global economic growth and, at cur-
The FDI thus takes a comprehensive view in assess- rent rates, could generate the majority of absolute GDP
ing the factors that contribute to the long-term devel- growth over the next five years. Although this finding is
opment of financial systems; it includes but is much encouraging in many respects, it also points toward
broader than just measures of immediate financial some risks: the financial systems in many of these
stability. countries are less developed than those in advanced
Because of this broad definition, for the top scorers economies. On average, emerging market economies
in the Index, the United States (1st) and the United scored 1.3 points lower than advanced economies in the
Kingdom (2nd), the very low scores in financial stability Index (see Figure 1, a comparison of GDP growth and
are counterbalanced by incumbent strengths in financial this year’s Index scores.)
intermediation that buoy their positions in the rankings. Although financial stability has been a relative
The two countries both show advantages in non- advantage for many emerging market economies over
banking financial services and financial markets, and the last several years, their performance in other areas of
the United Kingdom also demonstrates strength in the Index may increasingly constrain economic growth
banking financial services (based on measures of size at the country and global level. The risks to economic
and efficiency—financial stability is captured elsewhere). growth posed by these development areas can be seen
The business environments in both countries display in the following critical areas:
signs of deterioration, particularly in the area of
taxation. • Long-term financing for infrastructure. Banks may
As in last year’s Index, the economies in the top 10 be increasingly limited in their ability to provide
are predominantly smaller (by GDP) than the members the tenor and amount of financing needed to fund
of the G-8; this is true for 6 out of the top 10 in overall significant infrastructure needs. The development of
rank (see Table 1). These smaller economies include capital markets in many emerging markets may be
Hong Kong SAR (3rd), Singapore (4th), Australia (5th), necessary to fill this gap. Additionally, weaknesses in
Executive Summary

Figure 1: Absolute GDP growth vs. Financial in the institutional environments or financial stability
Development Index 2010 score of global financial centers such as United States and
United Kingdom persist or worsen, this will only add
to the urgency of developing financial systems in other
countries to promote sustained economic growth
l Average FDI score n Absolute GDP growth
worldwide.
$8 5
$7.7 trillion

4.45
(2010–2014, US$ trillions)

4
Absolute GDP growth

Overall FDI score


$7

$6.5 trillion
3.16 3

$6
2

$5 1
Emerging Advanced
markets economies

Source: GDP data taken from IMF, World Economic Outlook Database, April
2010.

xiv
the institutional environments of many economies
will need to be addressed to increase the willingness
of investors to commit long-term capital.

• Deep and accessible local bond markets. The local


bond markets in many Asian and Latin American
countries are not as developed as other parts of
their financial systems. This can limit the availability
of capital for important sectors, such as small- and
medium-sized enterprises (SMEs) (Chapter 1.3
discusses some of the obstacles to SME financing).
Additionally, strong local bond markets can be an
important defense against the harmful effects of
volatile capital flows (please see Chapter 1.2 for a
discussion of capital flows, capital controls, and
financial development).

• The extension of retail financial access. As seen in


many Asian and some Latin American countries,
poor access to retail financial services for consumers
may hinder efforts to stimulate local demand that
could help offset global economic imbalances.
Savings, credit (including mortgages), and insurance
can help increase and smooth the spending of con-
sumers who will be increasingly critical to sustain-
ing economic growth.

The recent financial crisis has underscored the


interconnected nature of financial systems. If weaknesses
Part 1
Findings from the Financial
Development Index 2010
1.1: The Financial Development Index 2010
CHAPTER 1.1 Continued global financial uncertainty has underscored
the complexity and interconnectedness of financial sys-
tems. Financial instability originally emanating primarily
The Financial Development from the US mortgage markets several years ago has
proceeded to manifest itself in a number of other asset
Index 2010: Unifying the classes and regions, most recently in sovereign debt in
the euro zone.1 Economies continue to grapple with
Narratives of Reform questions of financial reform that must be considered in
tandem with other fundamental questions, such as how
JAMES BILODEAU, World Economic Forum USA
to drive sustained economic growth and promote fiscal
IBIYE HARRY, World Economic Forum USA responsibility.
This complexity is also illustrated by the degree to
which the actions of different stakeholders have im-
pacted the functioning of financial systems. The indebt-
edness of both individuals and sovereign entities, risk
management by financial institutions, the originate-and-
distribute model facilitated by the “shadow” banking
system, oversight by regulators, and the promotion of
exports through exchange rate policy by lawmakers
have all been cited as factors influencing the develop-
ment of financial systems in the last several years. Some
recent research also traces the root cause of current finan-
cial instability to broader societal and economic ques-
tions such as the failure to address income inequality
through investments in human capital and education.2
As countries move from an immediate response to
financial crisis to the implementation of longer-term 3
policies that will influence the shape of financial systems
for years to come, it is important to view these actions
while keeping in mind this complexity of financial sys-
tems and the factors and stakeholders that influence
them. This includes objectively assessing which measures
will most improve overall financial development over
the long term; how they will affect the different stake-
holders within financial systems; and, ultimately, how
they will further economic prosperity for all participants
in the global economy. Empirical studies concerning
financial development and growth have generally found
that cross-country differences in levels of financial devel-
opment explain a considerable portion of the cross-
country differences in growth rates of economies.3
It is in this context that the third annual Financial
Development Report aims to provide policymakers with
a common framework to identify and discuss the range
of factors that are central to the development of global
financial systems and markets. It provides the Financial
Development Index (FDI), which ranks 57 of the
world’s leading financial systems and can be used by
countries to benchmark themselves and establish pri-
orities for financial system improvement. The Financial
Development Report is published annually so that coun-
tries can continue to benchmark themselves against their
peers and track their progress over time.
In recognition of the diversity of economies cov-
ered in the FDI and the variety of financial activities
that are vital to economic growth, the FDI provides a
holistic view of financial systems. For the purposes of
1.1: The Financial Development Index 2010

this Report and the FDI, we have defined financial devel- idea that countries that have experienced occasional
opment as the factors, policies, and institutions that lead to financial crises have, on average, demonstrated higher
effective financial intermediation and markets, as well as deep economic growth than countries that have exhibited
and broad access to capital and financial services. This defini- more stable financial conditions.7 Financial innovation,
tion thus spans the foundational supports of a financial when undertaken prudently, can also be important to
system, including the institutional and business environ- effectively screen and allocate funds to new and pro-
ments; the financial intermediaries and markets through ductive enterprises, particularly as technology evolves.8
which efficient risk diversification and capital allocation Thus, although it is important to mitigate the short-
occur; and the results of this financial intermediation term impact of crises, it is also important to view
process, which include the availability of, and access to, financial development in terms inclusive of, but
capital. broader than, financial stability.
The FDI relies upon current academic research in Economic theory suggests that financial markets
both selecting the factors that are included and in deter- and intermediaries exist mainly because of two types of
mining its overall structure. This encompasses a variety market frictions: information costs and transaction costs.
of measures intended to capture different dimensions of These frictions lead to the development of financial
financial stability that have been highlighted in the cur- intermediaries and financial markets, which perform
rent crisis. However, consistent with its purpose of sup- multiple functions. Among these are facilitating the trad-
porting the long-term development of financial systems ing, hedging, diversification, and pooling of risk; provid-
and their central role in economic growth, it also ing insurance services; allocating savings and resources to
encourages a broad analysis over a theoretical focus the appropriate investment projects; monitoring man-
on a few specific areas. With this holistic view, decision agers and promoting corporate control and governance;
makers can develop a balanced perspective as to which mobilizing savings efficiently; and facilitating the
aspects of their country’s financial system are most exchange of goods and services.
important and empirically calibrate this view relative Financial intermediation and financial markets
to other countries. contribute directly to increased economic growth and
aggregate economic welfare through their effect on cap-
4 ital accumulation (the rate of investment) and on tech-
Financial development and economic growth nological innovation. First, greater financial development
A large body of economic literature supports the prem- leads to greater mobilization of savings and its allocation
ise that, in addition to many other important factors, the to the highest-return investment projects. This increased
performance and long-run economic growth and wel- accumulation of capital enhances economic growth.
fare of a country are related to its degree of financial Second, by appropriately allocating capital to the right
development. Financial development is measured by fac- investment projects and promoting sound corporate
tors such as size, depth, access, and the efficiency and governance, financial development increases the rate of
stability of a financial system, which includes its markets, technological innovation and productivity growth, fur-
intermediaries, range of assets, institutions, and regula- ther enhancing economic growth and welfare.
tions. The higher the degree of financial development, Financial markets and intermediation also benefit
the wider the availability of financial services that allow consumers and firms in many other ways that are not
the diversification of risks. This increases the long-run directly related to economic growth. Access to financial
growth trajectory of a country and ultimately improves markets for consumers and producers can reduce pover-
the welfare and prosperity of producers and consumers ty, such as when the poor have access to banking ser-
that have access to financial services. The link between vices and credit. The importance of microfinance can
financial development and economic growth can be be seen in this context. This access allows consumers to
traced back to the work of Joseph Schumpeter in the smooth consumption over time by borrowing and/or
early 20th century,4 and more recently to Ronald lending and stabilizes consumer welfare in the presence
McKinnon and Edward Shaw. This link is now well of temporary shocks to wages and income. By con-
established in terms of empirical evidence.5 tributing to the diversification of savings and of port-
The slow economic recovery for many countries folio choices, it can also increase the return on savings
since the onset of the recent crisis has underscored and ensure higher income and consumption opportuni-
the negative impacts that financial systems can have on ties. Insurance services can help mitigate a variety of
economic growth; in general, economic recoveries after risks that individuals and firms face, thus allowing better
financial crises have been shown to be much slower risk sharing of individual or even macroeconomic risks.9
than those that occur after recessions not associated with
financial crises.6 However, it is important to consider the
positive impact that broader financial development and The seven pillars of financial development
more dynamic financial systems can have on longer- To understand and measure the degree of financial
term economic growth as well. Research supports the development, one must consider all of the different
1.1: The Financial Development Index 2010
Figure 1: Composition of the Financial Development Index

Financial Development Index

Factors, policies, Financial Financial access


and institutions intermediation

1. Institutional environment 4. Banking financial services 7. Financial access

2. Business environment 5. Non-banking financial services

3. Financial stability 6. Financial markets

Policymakers Financial End users


intermediaries of capital

Source: World Economic Forum.

5
factors that together contribute to the degree of depth of the seven pillars: the institutional environment, the
and efficiency of the provision of financial services. business environment, and the degree of financial
Conceptually, in thinking about an index that measures stability.
the degree of financial development, the various aspects
of development can be seen as seven “pillars” grouped First pillar: Institutional environment
into three broad categories, as indicated in Figure 1: The institutional environment encompasses the laws and
regulations that allow the development of deep and effi-
1. Factors, policies, and institutions: the foundational cient financial intermediaries, markets, and services as
characteristics that allow the development of finan- well as the macroprudential oversight of financial sys-
cial intermediaries, markets, instruments, and tems. This includes the overall laws, regulations, and
services. supervision of the financial sector, as well as the quality
of contract enforcement and corporate governance.
2. Financial intermediation: the variety, size, depth, Economic theory proposes that a strong institution-
and efficiency of the financial intermediaries and al environment exists to alleviate information and trans-
markets that provide financial services. action costs.10 Much empirical work has tackled issues
related to the importance of institutions and their
3. Financial access: access by individuals and busi- impact on economic activity in general. The presence of
nesses to different forms of capital and financial legal institutions that safeguard the interests of investors
services. is an integral part of financial development.11 Reforms
that bolster a country’s legal environment and investor
The seven pillars are organized and described below protection are likely to contribute to a more efficient
according to these three categories. (See Appendix A financial sector.12 Accordingly, we have included vari-
for the detailed structure of the FDI and a list of all ables related to the degree of judicial independence and
indicators.) judicial efficiency.
The recent crisis has clearly emphasized the impor-
tance of regulation at the institutional level as it relates
Factors, policies, and institutions to financial stability and corresponding effects on the
This first category covers those foundational features real economy. As highlighted in the recent financial cri-
that support financial intermediation and the optimal sis, central banks play a critical role in the functioning
provision of financial services and includes the first three of financial systems and this year we have included
1.1: The Financial Development Index 2010

Box 1: Financial development, capital flows, and capital controls


(Please see Chapter 1.2 by Howard Davies and Michael Drexler for a full discussion of this topic.)

According to classic economic theory, capital flows from devel- capital flow. An economy’s FDI scores in the three aforemen-
oped economies, which have a capital surplus, to developing tioned resilience categories can be aggregated into a defensive
markets, which have a surplus of investment opportunities. score and mapped against its GDP (see Figure 4, Chapter 1.2). If
However, this orthodox economic view has been challenged the GDP is small and the defensive score is also small, an econ-
by a number of events. Research has also found that capital omy can be potentially at risk from speculative flows. As a
has recently flowed from emerging economies, such as China second step, it can also be insightful to map the relationship
and the Middle East, to developed markets, such as the United between an economy’s defensive score and its advanced mar-
States. ket score, which aggregates selected variables from the FDI
Capital flows are a feature of globalization and offer related to the development of more advanced asset markets.
a number of worthwhile benefits. These include enabling Despite the importance of the resilience measures previously
investors to promote the long-term allocation of resources and described, they might not prevent a capital flow episode that
providing liquidity and financing where needed. The question is threatens the systemic stability of a local economy.
one of how to harness these benefits while mitigating potential Consequently, there can be circumstances where measures of
risks. Such risks are of particular concern for smaller capital control are required. Historical episodes show that five
economies that are still in development. Capital flows that are types of capital controls have been employed most frequently:
large relative to a local economy generally bring three dangers: (1) unremunerated reserve requirements, (2) time requirements,
(1) inflation of bubbles, (2) currency mismatches, and (3) maturi- (3) quantitative limits, (4) direct tax on financial transactions,
ty or liquidity mismatches. Categories of resilience against and (5) the regulation of trade between residents and non-
these risks include (1) deep local asset markets, (2) deep local residents. The efficacy of a capital control will depend on the
currency markets, and (3) well-developed local debt markets. motivation of the speculators it is supposed to deter and also
The Financial Development Index (FDI) can help on the state of the economy in which it is implemented.
economies assess their resilience to episodes of excessive

measures related to central bank transparency.13 A meas- among savers and investors. This in turn increases the
ure of the effectiveness of regulation of securities monetization of an economy, resulting in a more effi-
exchanges is also included. The degree to which coun- cient flow of resources.18 Empirically, however, the
tries coordinate or harmonize their regulatory regimes impact of capital account liberalization delivers mixed
internationally is also an important consideration. evidence. Several studies have asserted that capital
However, since there is little in the way of cross-country account liberalization has no impact on growth, while
data that captures this in a uniform way, we are unable others have found a positive, and statistically significant,
to include a specific indicator for this—at least until fur- impact.19 At the same time, other work asserts that the
ther research becomes available. relationship is undetermined.
Better corporate governance is believed to encour- Given such ambiguity over the impact of capital
age financial development, which in turn has a positive account openness, it is best examined within the
impact on growth.14 Contract enforcement is also context of the legal environment. The better a country’s
important because it limits the scope for default among legal and regulatory environment, the greater the bene-
debtors, which in turn promotes compliance. Variables fits from capital account openness—and vice versa.
capturing these measures as they relate to the formal Accordingly, within the FDI we try to capture the rela-
transfer of funds from savers to investors are included in tionship between capital account openness and the level
the pillar.15 Inadequate investor protection leads to a of legal and regulatory development, and have interacted
number of adverse effects, which can be detrimental to the variables used to measure each (see Appendix A).
external financing and ultimately to the development of The presence of both a robust legal and regulatory sys-
well-functioning capital markets.16 In general, inade- tem and capital account openness provides a positive
quate enforcement of financial contracts has been found indication of the financial development of a country. We
to augment the process of credit rationing, thus hinder- have also interacted the capital account openness vari-
ing the overall process of growth.17 able with the level of bond market development because
Other important aspects of the institutional environ- of research that asserts the importance of developing
ment are a country’s capital account openness and domes- domestic bond markets in advance of full liberalization
tic financial sector liberalization. Financial liberalization of the capital accounts.20 (Please see Box 1 for further
generally permits a greater degree of financial depth, discussion of capital flows and capital controls in the
which translates into greater financial intermediation context of financial development.) Assessments of
1.1: The Financial Development Index 2010
commitment to WTO trade agreements as they relate to research has shown that the cost of doing business is a
financial services have also been included and interacted vital feature of the efficiency of financial institutions.
in a similar manner. The different costs of doing business are fundamental to
A similar analysis can be extended to the degree of assessing a country’s business environment as well as the
liberalization of the domestic financial sector. This type of constraints that businesses may be facing.25 As
degree of liberalization is based on whether a country such, the better the business environment, the better the
exerts interest rate controls (either ceilings or floors), performance of financial institutions and the higher the
whether credit ceilings exist, and whether foreign cur- degree of financial development. Variables that capture
rency deposits are allowed. In general, the better a coun- such costs include the World Bank’s measures of the cost
try’s legal and regulatory environment, the greater the of starting a business, the cost of registering property,
impact of domestic financial sector liberalization on a and the cost of closing a business. Indirect or transaction
country’s economic growth. Variables representing each costs are captured in variables such as time to start a
of these characteristics have been interacted to represent business, time to register property, and time to close a
this result. Recent research supports the importance of business.
advanced legal systems and institutions in this respect, Our analysis also considers taxes as another key
holding that the presence of such institutions is as vital constraint that businesses in the financial sector can face.
as having both a developed banking sector and equity The variables in this subpillar focus on issues related to
markets.21 distortionary and burdensome tax policies, reflecting
clearer consensus around the importance of these issues.
Second pillar: Business environment High marginal tax rates have been found to have distor-
The second pillar focuses on the business environment tionary effects, so we have included a variable to capture
and considers: this. Because there is less clarity in the academic litera-
ture around the effects of absolute rates of taxation and
• the availability of human capital—that is, skilled issues of data comparability, we have not included meas-
workers who can be employed by the financial ures related to overall tax rates.
sector and thus provide efficient financial services;
Third pillar: Financial stability 7
• the state of physical capital—that is, the physical The third pillar addresses the stability of the financial
and technological infrastructure; and system. The severe negative impacts of financial instabil-
ity on economic growth can be profoundly seen in the
• other aspects of the business environment, including recent financial crisis as well as in past financial crises.
taxation policy and the costs of doing business for This instability can lead to significant losses to investors,
financial intermediaries. resulting in systemic banking crises, systemic corporate
crises, currency crises, and sovereign debt crises.
The creation and improvement of human capital This pillar captures the risk of three types of crises:
have been found to assist the process of economic currency crises, systemic banking crises, and sovereign
growth.22 Empirical evidence supports this observation debt crises. For the risk of currency crises, we include
and shows positive correlations between human capital the change in real effective exchange rate, the current
and the degree of financial development.23 Our proxies account balance, a dollarization vulnerability indicator,
for the quality of human capital are related to the an external vulnerability indicator, external debt to
enrollment levels of tertiary education. We also include GDP, and net international investment position. The
measures that reflect the quality of human capital, such external debt to GDP and net international investment
as the degree of staff training, the quality of manage- position variables are specifically applied to developing
ment schools and math and science education, and the and developed countries, respectively.
availability of research and training services. The systemic banking crises subpillar combines
Another key area is infrastructure. We capture a measures of historic banking system instability, an assess-
basic measure of the quality of physical infrastructure, ment of aggregate balance sheet strength, and measures
which is important given its role in enhancing the of the presence of “bubbles.” Historic instability is cap-
process of private capital accumulation and financial tured in a measure of the frequency of banking crises
depth in countries by increasing the profitability of since the 1970s; more recent banking crises are given
investment.24 However, our analysis of infrastructure greater weight. Empirical research has shown that coun-
emphasizes measures of information and communication tries that have gone through systemic banking crises or
technologies, which are particularly important to those endured a high degree of financial volatility are more
firms operating within a financial context because of susceptible to profound short-term negative impacts on
their data-intensive nature. the degree of financial intermediation.26 We also capture
Another integral aspect of the business environment the degree of economic output loss associated with
is the cost of doing business in a country. Specifically, crises (weighting output loss from more recent crises
1.1: The Financial Development Index 2010

more heavily.) A Financial Stress Index also captures the banking financial services, non-banking financial ser-
incidence of financial stress in countries that do not vices (e.g., investment banks and insurance firms), and
reach the proportions of a full-blown crisis.27 It is financial markets.
important that prudential regulation include the estab- Consensus exists on the relationship between the
lishment of uniform capital adequacy requirements, and size and depth of the financial system and the supply
accordingly we have included a measurement of Tier 1 and robustness of financial services that are important
capital in this subpillar.28 Some research indicates that contributors to economic growth.30 This relationship
quantitative capital adequacy measures are not always occurs because the size of financial markets is viewed as
accurate measures of the financial strength of banks in an important determinant of savings and investment.31
developing countries.29 Accordingly, we have included a The size (total financial assets within a country) of the
financial strength indicator that balances quantitative financial system also matters because the larger it is, the
measures of balance-sheet strength with qualitative greater its ability to benefit from economies of scale,
assessments of banks’ abilities to meet their obligations given the significant fixed costs prevailing in financial
to depositors and creditors. intermediaries’ activities. A larger financial system tends
The last type of crisis captured within the financial to relieve existing credit constraints. This facilitates bor-
stability pillar is sovereign debt crisis. The manageability rowing by firms and further improves the process of
of public debt defined as total public debt as a percent- savings mobilization and the channeling of savings to
age of GDP is included in this pillar. The ability of investors. Given that a large financial system should allo-
countries to pay this debt in full and in a timely manner cate capital efficiently and better monitor the use of
is captured in sovereign credit ratings, an important funds, improved accessibility to financing will tend to
proxy for the risk of such a crisis; these data were cal- amplify the resilience of an economy to shocks.
culated as an average of both local currency sovereign Thus, a deeper (total financial assets as a percentage
credit ratings and foreign currency sovereign credit rat- of GDP) financial system is an important component of
ings. A high sovereign credit rating signifies less likeli- financial development as it contributes to economic
hood of default occasioned by a sovereign debt crisis. growth rates across countries.32 Measures of size and
Credit default swaps provide a quantitative, market- depth have been included in each of the three financial
8 based indicator of the ability of a country to repay its intermediation pillars to capture this factor.
debt. Macroprudential measures such as inflation and
GDP growth are also included, as these also influence Fourth pillar: Banking financial services
the ability of countries to service their debt. Although the previous pillar captures some of the nega-
The greater the risk of these crises, the greater the tive impacts that an unstable banking system can have
likelihood that the different processes of financial inter- on an economy, banks also play a vital role in supporting
mediation will be hampered, precipitating lower eco- economic growth. This role is captured in the fourth
nomic growth rates. However, these effects of financial pillar. Bank-based financial systems emerge to improve
stability on economic growth can be considered in acquisition of financial information and to lower trans-
terms of a tradeoff between risk and innovation/return. action costs, as well as to allocate credit more effi-
For example, a financial system that is very heavily ciently. This role is especially important in developing
supervised and regulated may be very stable and never economies.
spark a financial crisis. However, such a controlled sys- The efficient allocation of capital in a financial sys-
tem would hamper the financial development and inno- tem generally occurs through bank-based systems or
vation that increases returns, diversifies risks, and better market-based financial systems.33 Some research asserts
allocates resources to the highest-return investments. that banks finance growth more effectively and effi-
Conversely, a financial system that is very free and inno- ciently than market-based systems, particularly in under-
vative and is very lightly regulated and supervised may developed economies where non-bank financial inter-
eventually become unstable and trigger credit booms mediaries are generally less sophisticated.34 Research
and asset bubbles that can severely affect growth, also shows that, compared with other forms of financial
returns, and welfare. Although there is some tradeoff intermediation, well-established banks form strong ties
between the stability of the financial system and its with the private sector, a relationship that enables them
degree of innovation and sophistication, financial stabili- to acquire information about firms more efficiently and
ty remains an important input in the process of financial to persuade firms to pay their debts in a timely man-
development. ner.35 Advocates of bank-based systems argue that banks
that are unimpeded by regulatory restrictions tend to
benefit from economies of scale in the process of col-
Financial intermediaries and markets lecting information and can thus enhance industrial
The second category of pillars measures the degree of growth. Banks are also seen as key players in eradicating
development of the financial sector as seen in the dif- liquidity risk, which causes them to increase investments
ferent types of intermediaries. These three pillars are
1.1: The Financial Development Index 2010
in high-return, illiquid assets and speed up the process proxy of a country’s overall level of financial develop-
of economic growth.36 ment.38 Empirical research has found that banks as well
One of the key measures of the efficacy of the as non-bank financial intermediaries are larger, more
banking system captured in this pillar is size. The larger active, and more efficient in advanced economies.39
the banking system, the more capital can be channeled Advocates of the market-based system (i.e., non-banks)
from savers to investors. This enhances the process of point to the fact that it is able to finance innovative and
financial development, which in turn leads to greater high-risk projects.40 There are three main areas of non-
economic growth. These measures of size span deposit bank financing activity that we capture in the Index:
money bank assets to GDP, M2 to GDP, and private initial public offering (IPO), merger and acquisitions
credit to GDP. Another key aspect of the banking sys- (M&A) activity, and securitization activity.
tem is its efficiency. Direct measures of efficiency cap- Additionally, we include a number of variables on
tured in the Index are aggregate operating ratios, such the insurance sector, which can facilitate trade and com-
as bank operating cost to assets and the ratio of non- merce by providing ample liability coverage. Insurance
performing loans to total loans. An indirect measure of also creates liquidity and facilitates the process of build-
efficiency is public ownership. Publicly owned banks ing economies of scale in investment, thereby improving
tend to be less efficient, impeding the processes of credit overall financial efficiency.41 And insurance has been
allocation and channeling capital, which in turn slows found to mobilize illiquid savings to positively affect
the process of financial intermediation. growth.42
Measures of operating efficiency may provide an
incomplete picture of the efficacy of the banking system Sixth pillar: Financial markets
if it is not profitable. We have thus also included an The four major types of financial markets include bond
aggregate measure of bank profitability. Conversely, if markets (both for government and corporate bonds),
banks are highly profitable while performing poorly in stock markets where equities are traded, foreign
the operating measures, then this may indicate a lack of exchange markets, and derivatives markets.
competition along with undue and high inefficiency. Stock market liquidity is statistically significant in
A third key aspect of the efficacy of the banking terms of its positive impact on capital accumulation,
system captured by this pillar is the role of financial productivity growth, and current and future rates of 9
information disclosure within the operation of banks. economic growth.43 More generally, economic theory
Policies that induce correct information disclosure and suggests that stock markets encourage long-run growth
that authorize private-sector corporate control of banks, by promoting specialization, acquiring and disseminating
as well as motivate private agents to exercise corporate information, and mobilizing savings in a more efficient
control, tend to encourage bank development, opera- way to promote investment.44 Research also shows that
tion, and stability.37 This has a positive effect on the as countries become richer, stock markets become more
overall economy. active and efficient relative to banks.45 Bond markets
have received little empirical attention, but recent
Fifth pillar: Non-banking financial services research has shown that bond markets play an important
Non-bank financial intermediaries—such as broker role in financial development and the effective allocation
dealers, traditional asset managers, alternative asset man- of capital.46
agers, and insurance companies—can be both an impor- Derivatives markets are an important aspect of this
tant complement to banks and a potential substitute for pillar because they can significantly improve risk man-
them. Their complementary role lies in their efforts to agement and risk diversification. The development of
fill any vacuum created by commercial banks. Their derivatives markets can enhance the confidence of inter-
competition with banks allows both parties to operate national investors and financial institutions and encour-
more efficiently in meeting market needs. Activities of age these agents to participate in them. Derivatives
non-bank financial intermediaries include their partici- markets generally are small in emerging markets. The
pation in securities markets as well as the mobilization strengthening of the legal and regulatory environment
and allocation of financial resources of a longer-term can enhance the development of such markets.47
nature—for example, in insurance activities. Because
of inadequate regulation and oversight, certain non-
banking financial services, such as securitization, played Financial access
a detrimental role in the current financial crisis as part This third and final category is comprised of one pillar
of the so-called shadow banking system. However, that represents measures of access to capital and financial
within the context of a sound legal and regulatory services.
framework, they fulfill unique and vital roles as financial
intermediaries. Seventh pillar: Financial access
The degree of development of non-bank financial The measures represented in this last pillar span meas-
intermediaries in general has been found to be a good ures of access to capital through both commercial and
1.1: The Financial Development Index 2010

the different channels (and issues) associated with each.


Box 2: SME finance: What have we learned and Commercial access includes measures such as access to
what do we need to learn? venture capital, commercial loans, and the local equity
markets. Retail access includes measures such as the
(Please see Chapter 1.3 by Thorsten Beck for a full discussion of this
topic.)
penetration of bank accounts and ATMs and access to
microfinance; these data were provided by the
The availability of financing to small- and medium-sized en- Consultative Group to Assist the Poor and the
terprises (SMEs) has recently gained prominence in policy- Microfinance Information Exchange.
makers’ debates. The rising profile of this topic has been Given the importance of small- and medium-sized
reflected in a number of realms including discussions on enterprises (SMEs) in driving economic growth in
financial sector reform and the G-20’s establishment of an many countries, the importance of financial access for
SME finance committee. SMEs has recently been highlighted by organizations
Empirical research shows that SMEs are more con- such as the G-20. Please see Box 2 and the subsequent
strained by financing and other institutional obstacles than
chapter by Thorsten Beck for a full discussion of some
are large enterprises. These constraints are exacerbated by
of the financial access issues faced by SMEs. Depending
weaknesses in the financial systems of many developing
countries. An access possibilities frontier can be used to
on how they are defined (and they are defined differ-
explain how difficulties in managing risk and transaction ently across many countries), SMEs can have financial
costs involved in SME lending make financial institutions and needs that can be viewed from the perspective of both
markets very reluctant to reach out to this group of enterpris- retail and commercial access. There is a shortage of
es, especially in developing countries. The frontier is defined global data related to SME finance, but the G-20 and
as the maximum share of SMEs that can be served by finan- other multilateral organizations have highlighted this
cial institutions in a commercially viable way. The location of need; when new data become available we will incorpo-
the frontier in a particular economy, and thus the share of rate them into the Index.
bankable SMEs, is determined by technology as well as by Performance in the other pillars contributes to per-
the institutional framework within which financial institutions formance in this pillar and to the extent of access to
operate.
financial services by end users. Accessibility, along with
A number of different business models and lending
10 the size and depth of the financial system as a whole
techniques, as well as policies and reforms, can entice
financial institutions and markets to lend to SMEs. Despite a
captured in the previous pillars, has a significant effect
traditional focus on relationship lending, research has found on a country’s real activity, economic growth, and over-
that both relationship- and transaction-based lending tech- all welfare.
niques are appropriate for SME lending. With respect to
policymaking, three policy categories exist in expanding
SMEs’ access to external finance. Market-developing poli- Adjustments to the Financial Development Index
cies can help push out the frontier, market-enabling policies this year
push incumbent and new financial institutions toward the The overall structure of the Financial Development
existing frontier, while market-harnessing policies prevent Index remains the same as that used in last year’s Report.
the financial system from moving beyond the frontier toward There are still seven pillars in the Index with the same
a point of financial fragility. associated subpillars in each. Each of these subpillars
The access possibilities frontier allows for a more rigor- contains the constituent variables that make up the
ous analysis of obstacles to SME finance in a specific coun- Index. Appendix A lays out the complete structure and
try. However, this analysis must also take into account the
methodological detail for the Index.
differing size and nature of SMEs across countries.
We have made some minor improvements to the
Index this year at the variable level. We have added three
indicators to enhance the banking system stability sub-
pillar. A measure of output loss during banking crises
provides an indication of the depth of past crises in
terms of their effect on overall economic output. A
retail channels. Empirically, greater access to financial Financial Stress Index indicates the degree to which a
services has been associated with the usual proxies for financial system is under strain irrespective of the exis-
financial development and the resulting economic tence of a full-blown crisis. The inclusion of the Tier 1
growth.48 The presence of financial services per se as capital ratio provides a measure of capital adequacy
reflected by size and depth does not imply their accessi- within the banking system. We removed the manage-
bility by the different types of users within an economy. ability of private debt variable from last year’s Report as
Thus, the presence of access becomes integral to our it was based on securitized debt, which did not provide
analysis. a sufficiently consistent measure of debt across all coun-
We separate our access measures within this pillar tries in our sample.
into retail and commercial access measures in light of
1.1: The Financial Development Index 2010
We have enhanced the non-banking financial serv- Table 1: The Financial Development Index 2010
ices pillar by adding some insurance-related variables. rankings: Comparison with 2009
Two variables provide better measurement of the non-
2010
life insurance market in terms of both density and 2010 2009 score Change
Country/Economy rank rank (1–7) in score
coverage. We have also added a variable related to life
United States 1 3 5.12 –0.01
insurance coverage. Given the importance of local bond
United Kingdom 2 1 5.06 –0.22
markets as a source of capital within economies, we
Hong Kong SAR 3 5 5.04 +0.06
also added a measure of local currency corporate bond Singapore 4 4 5.03 +0.01
issuance to GDP within the bond markets subpillar. Australia 5 2 5.01 –0.12
We removed two variables related to the corporate Canada 6 6 4.98 +0.02
governance subpillar within the institutional environ- Netherlands 7 8 4.73 –0.12
ment pillar—official supervisory power and private Switzerland 8 7 4.71 –0.21

monitoring of the banking industry—because of a Japan 9 9 4.67 +0.03


Belgium 10 13 4.65 +0.15
lack of updated data.
France 11 11 4.63 +0.06
We have also added two countries to the Index:
Sweden 12 14 4.60 +0.11
Morocco and Romania. This raises the total number Germany 13 12 4.49 –0.05
of countries covered in the Index from 55 to 57. Spain 14 15 4.42 +0.02
Accordingly, this will lower the year-on-year ranks of Norway 15 17 4.31 –0.06
countries that score below either of these countries. Denmark 16 10 4.30 –0.34
Malaysia 17 22 4.20 +0.23
Ireland 18 16 4.20 –0.19

The Financial Development Index 2010 rankings Austria 19 18 4.20 –0.09


Finland 20 19 4.12 –0.12
The overall ranking for this year’s Financial Development
United Arab Emirates 21 20 4.03 –0.18
Report can be seen in Table 1, along with the 2009 rank-
China 22 26 4.03 +0.16
ing, the Index score, and the change in score from last Bahrain 23 27 4.00 +0.15
year. Looking broadly across the results for the 57 coun- Korea, Rep. 24 23 4.00 +0.09
tries covered in the Index, there are some overall trends Italy 25 21 3.95 –0.03 11
that emerge. Saudi Arabia 26 24 3.87 –0.02
Israel 27 28 3.85 +0.16

Overall trends in 2010 rankings Kuwait 28 30 3.69 +0.07


Jordan 29 25 3.65 –0.24
In comparing Index scores from 2009 and 2010, we see
Chile 30 31 3.53 –0.06
a fairly even split between countries that have advanced
South Africa 31 32 3.53 +0.05
and those that have declined. The top-ranked countries Brazil 32 34 3.53 +0.06
within the Index do not change significantly, although Czech Republic 33 33 3.46 –0.02
the United States does take the top spot from the Thailand 34 35 3.37 +0.03
United Kingdom (2nd); the US score remains essentially Poland 35 39 3.33 +0.06
unchanged from last year, while the United Kingdom’s Slovak Republic 36 37 3.30 0.00
India 37 38 3.24 –0.05
drops the most of any country within the top 10. It is
Egypt 38 36 3.24 –0.09
only very minor score differentials that separate the
Panama 39 29 3.22 –0.41
United Kingdom from the next five countries that score Russian Federation 40 40 3.21 +0.05
below it—Hong Kong, Singapore, Australia, Canada, and Morocco 41 n/a 3.20 n/a
the Netherlands. Turkey 42 44 3.18 +0.15
In terms of the rest of the top 20, Denmark shows Mexico 43 43 3.07 +0.01
the biggest decline, falling from 10th to 16th place. Romania 44 n/a 3.05 n/a

Malaysia achieves a significant increase, moving from Hungary 45 41 3.04 –0.04


Vietnam 46 45 3.03 +0.04
22nd to 17th place, earning its place as the only emerg-
Colombia 47 46 3.02 +0.08
ing market in the top 20 of the Index.
Peru 48 42 3.01 –0.06
All of the BRIC country rankings either improve Kazakhstan 49 47 2.98 +0.05
slightly or stay the same. China shows the biggest Philippines 50 50 2.97 +0.14
advance, moving up four spots to 22nd place. Brazil Indonesia 51 48 2.90 0.00
(34th) moves up two spots, India (37th) one spot, and Argentina 52 51 2.78 +0.01
Russia stays the same at 40th place. Ukraine 53 53 2.76 +0.05

As with past years, there can be considerable varia- Pakistan 54 49 2.62 –0.23
Bangladesh 55 54 2.55 –0.02
tion across the seven pillars for specific countries, as can
Venezuela 56 55 2.55 +0.03
be seen in the pillar results in Table 2. For instance,
Nigeria 57 52 2.43 –0.29
Sweden, Norway, and Denmark all achieve top ranks in
the Institutional environment pillar (2nd, 3rd, and 4th
1.1: The Financial Development Index 2010

Table 2: Financial Development Index 2010

OVERALL INDEX FACTORS, POLICIES, AND INSTITUTIONS

1st pillar: Institutional environment 2nd pillar: Business environment 3rd pillar: Financial stability
Country/Economy Rank Score Country/Economy Rank Score Country/Economy Rank Score Country/Economy Rank Score

United States 1 5.12 Singapore 1 6.08 Sweden 1 5.99 Saudi Arabia 1 6.11
United Kingdom 2 5.06 Sweden 2 6.05 Singapore 2 5.91 Hong Kong SAR 2 5.75
Hong Kong SAR 3 5.04 Norway 3 5.88 Hong Kong SAR 3 5.89 Malaysia 3 5.68
Singapore 4 5.03 Denmark 4 5.88 Finland 4 5.87 Singapore 4 5.66
Australia 5 5.01 Canada 5 5.87 Switzerland 5 5.80 Switzerland 5 5.64
Canada 6 4.98 United Kingdom 6 5.79 Denmark 6 5.79 United Arab Emirates 6 5.48
Netherlands 7 4.73 Finland 7 5.78 Canada 7 5.72 Chile 7 5.38
Switzerland 8 4.71 Germany 8 5.78 Netherlands 8 5.66 Norway 8 5.37
Japan 9 4.67 Netherlands 9 5.76 Norway 9 5.62 Australia 9 5.21
Belgium 10 4.65 Hong Kong SAR 10 5.70 France 10 5.56 Brazil 10 5.15
France 11 4.63 Switzerland 11 5.66 Belgium 11 5.54 France 11 5.13
Sweden 12 4.60 Austria 12 5.66 Germany 12 5.51 Finland 12 5.09
Germany 13 4.49 Belgium 13 5.59 Australia 13 5.48 Canada 13 5.03
Spain 14 4.42 United States 14 5.58 Bahrain 14 5.45 Slovak Republic 14 4.98
Norway 15 4.31 Ireland 15 5.55 United Kingdom 15 5.45 Mexico 15 4.98
Denmark 16 4.30 Japan 16 5.54 Austria 16 5.37 Morocco 16 4.95
Malaysia 17 4.20 France 17 5.51 United States 17 5.37 China 17 4.93
Ireland 18 4.20 Australia 18 5.47 Ireland 18 5.36 Kuwait 18 4.91
Austria 19 4.20 Israel 19 5.13 Korea, Rep. 19 5.33 Belgium 19 4.83
Finland 20 4.12 Malaysia 20 5.05 Japan 20 5.13 Peru 20 4.82
United Arab Emirates 21 4.03 Bahrain 21 5.01 United Arab Emirates 21 5.11 Austria 21 4.80
China 22 4.03 Spain 22 4.96 Saudi Arabia 22 5.02 Czech Republic 22 4.79
Bahrain 23 4.00 United Arab Emirates 23 4.78 Spain 23 4.87 Bahrain 23 4.73
Korea, Rep. 24 4.00 Hungary 24 4.59 Italy 24 4.76 Germany 24 4.72
12 Italy 25 3.95 Jordan 25 4.47 Hungary 25 4.75 Thailand 25 4.71
Saudi Arabia 26 3.87 Romania 26 4.47 Romania 26 4.74 Denmark 26 4.67
Israel 27 3.85 Chile 27 4.46 Slovak Republic 27 4.68 Sweden 27 4.62
Kuwait 28 3.69 South Africa 28 4.42 Czech Republic 28 4.67 South Africa 28 4.56
Jordan 29 3.65 Saudi Arabia 29 4.36 Turkey 29 4.62 Poland 29 4.55
Chile 30 3.53 Italy 30 4.32 Malaysia 30 4.59 Bangladesh 30 4.52
South Africa 31 3.53 Thailand 31 4.32 Chile 31 4.53 Netherlands 31 4.51
Brazil 32 3.53 Panama 32 4.28 Kuwait 32 4.51 Israel 32 4.47
Czech Republic 33 3.46 Czech Republic 33 4.20 Israel 33 4.45 Japan 33 4.46
Thailand 34 3.37 Korea, Rep. 34 4.11 Russian Federation 34 4.43 Colombia 34 4.44
Poland 35 3.33 China 35 4.08 Poland 35 4.42 Egypt 35 4.39
Slovak Republic 36 3.30 Poland 36 4.04 Colombia 36 4.33 Indonesia 36 4.39
India 37 3.24 Kuwait 37 3.87 Thailand 37 4.29 Philippines 37 4.38
Egypt 38 3.24 Egypt 38 3.85 China 38 4.26 Italy 38 4.29
Panama 39 3.22 Turkey 39 3.82 Kazakhstan 39 4.16 United States 39 4.26
Russian Federation 40 3.21 Slovak Republic 40 3.81 Panama 40 4.14 Venezuela 40 4.25
Morocco 41 3.20 Peru 41 3.67 Morocco 41 4.02 Jordan 41 4.20
Turkey 42 3.18 Philippines 42 3.64 Argentina 42 4.02 Russian Federation 42 4.17
Mexico 43 3.07 Nigeria 43 3.63 Jordan 43 3.96 Korea, Rep. 43 4.15
Romania 44 3.05 Brazil 44 3.61 Ukraine 44 3.94 Panama 44 4.09
Hungary 45 3.04 Vietnam 45 3.58 South Africa 45 3.92 India 45 4.03
Vietnam 46 3.03 Indonesia 46 3.54 Mexico 46 3.90 United Kingdom 46 3.99
Colombia 47 3.02 Colombia 47 3.52 Peru 47 3.83 Spain 47 3.94
Peru 48 3.01 Mexico 48 3.51 Egypt 48 3.81 Vietnam 48 3.87
Kazakhstan 49 2.98 Morocco 49 3.37 Brazil 49 3.80 Kazakhstan 49 3.82
Philippines 50 2.97 Kazakhstan 50 3.23 Pakistan 50 3.60 Romania 50 3.77
Indonesia 51 2.90 India 51 3.21 Vietnam 51 3.47 Turkey 51 3.70
Argentina 52 2.78 Argentina 52 3.21 India 52 3.35 Pakistan 52 3.65
Ukraine 53 2.76 Russian Federation 53 3.15 Philippines 53 3.34 Ireland 53 3.60
Pakistan 54 2.62 Pakistan 54 2.94 Indonesia 54 3.22 Argentina 54 3.24
Bangladesh 55 2.55 Ukraine 55 2.83 Venezuela 55 3.07 Ukraine 55 3.13
Venezuela 56 2.55 Bangladesh 56 2.53 Nigeria 56 2.83 Nigeria 56 3.07
Nigeria 57 2.43 Venezuela 57 2.34 Bangladesh 57 2.80 Hungary 57 2.89
1.1: The Financial Development Index 2010
Table 2: Financial Development Index 2010 (cont’d.)

FINANCIAL INTERMEDIATION FINANCIAL ACCESS

4th pillar: Banking 5th pillar: Non-banking


financial services financial services 6th pillar: Financial markets 7th Pillar: Financial access
Country/Economy Rank Score Country/Economy Rank Score Country/Economy Rank Score Country/Economy Rank Score

United Kingdom 1 5.36 United States 1 6.07 United States 1 5.83 Australia 1 5.22
Netherlands 2 5.34 United Kingdom 2 5.51 Singapore 2 5.08 Hong Kong SAR 2 5.11
Hong Kong SAR 3 5.33 Canada 3 4.49 Switzerland 3 5.02 Belgium 3 5.07
Spain 4 5.24 China 4 4.45 United Kingdom 4 5.02 Saudi Arabia 4 4.73
Japan 5 5.17 Russian Federation 5 4.28 Japan 5 4.84 United States 5 4.70
Ireland 6 5.07 Korea, Rep. 6 4.15 Australia 6 4.68 Canada 6 4.67
Australia 7 5.06 Japan 7 4.14 France 7 4.56 Sweden 7 4.65
China 8 4.91 Australia 8 3.96 Netherlands 8 4.51 Austria 8 4.51
Belgium 9 4.88 Netherlands 9 3.65 Kuwait 9 4.41 Bahrain 9 4.48
Sweden 10 4.81 Spain 10 3.64 Germany 10 4.31 United Kingdom 10 4.30
Canada 11 4.76 Singapore 11 3.61 Hong Kong SAR 11 4.31 Norway 11 4.27
Malaysia 12 4.70 Brazil 12 3.56 Canada 12 4.30 Spain 12 4.27
Singapore 13 4.64 India 13 3.53 Belgium 13 4.07 Singapore 13 4.26
Bahrain 14 4.61 Germany 14 3.43 Spain 14 4.00 France 14 4.19
Switzerland 15 4.52 France 15 3.39 Italy 15 3.90 United Arab Emirates 15 4.08
Norway 16 4.33 Ireland 16 3.18 Denmark 16 3.78 Ireland 16 3.82
Germany 17 4.33 Hong Kong SAR 17 3.18 Sweden 17 3.64 Israel 17 3.74
Austria 18 4.21 Malaysia 18 3.17 Korea, Rep. 18 3.46 Vietnam 18 3.72
Denmark 19 4.19 South Africa 19 2.76 Jordan 19 3.34 Netherlands 19 3.69
United Arab Emirates 20 4.17 Switzerland 20 2.75 Finland 20 3.32 Malaysia 20 3.63
Israel 21 4.15 Italy 21 2.70 Austria 21 2.88 Egypt 21 3.61
Italy 22 4.13 Kazakhstan 22 2.55 Israel 22 2.82 Italy 22 3.59
France 23 4.09 Belgium 23 2.55 Ireland 23 2.82 Chile 23 3.56
Finland 24 4.08 Ukraine 24 2.48 India 24 2.81 Switzerland 24 3.56
13
Panama 25 4.03 Argentina 25 2.48 Malaysia 25 2.61 Denmark 25 3.52
Jordan 26 4.03 Sweden 26 2.40 Norway 26 2.60 China 26 3.44
United States 27 4.01 Poland 27 2.37 South Africa 27 2.45 Brazil 27 3.42
Korea, Rep. 28 3.96 United Arab Emirates 28 2.32 United Arab Emirates 28 2.30 Japan 28 3.38
Czech Republic 29 3.88 Jordan 29 2.30 Hungary 29 2.24 Germany 29 3.34
Kuwait 30 3.73 Denmark 30 2.27 China 30 2.14 Czech Republic 30 3.31
South Africa 31 3.68 Israel 31 2.21 Venezuela 31 2.13 Turkey 31 3.29
Morocco 32 3.63 Philippines 32 2.17 Thailand 32 2.05 Panama 32 3.27
Thailand 33 3.55 Egypt 33 2.14 Russian Federation 33 2.05 Slovak Republic 33 3.24
Saudi Arabia 34 3.53 Norway 34 2.13 Brazil 34 1.93 Jordan 34 3.22
Vietnam 35 3.49 Finland 35 2.12 Saudi Arabia 35 1.91 Bangladesh 35 3.12
Slovak Republic 36 3.41 Indonesia 36 2.07 Pakistan 36 1.90 Thailand 36 3.11
Chile 37 3.24 Colombia 37 2.06 Philippines 37 1.88 Hungary 37 3.05
Brazil 38 3.22 Bahrain 38 1.99 Egypt 38 1.87 Poland 38 3.05
Poland 39 3.13 Mexico 39 1.98 Turkey 39 1.87 Indonesia 39 3.02
Turkey 40 3.07 Austria 40 1.96 Romania 40 1.85 Romania 40 3.01
India 41 3.06 Turkey 41 1.90 Poland 41 1.76 Kuwait 41 2.99
Egypt 42 3.03 Morocco 42 1.89 Bahrain 42 1.74 Mexico 42 2.95
Argentina 43 2.93 Chile 43 1.86 Kazakhstan 43 1.71 South Africa 43 2.95
Kazakhstan 44 2.86 Czech Republic 44 1.73 Chile 44 1.71 Peru 44 2.93
Bangladesh 45 2.77 Venezuela 45 1.70 Morocco 45 1.63 Morocco 45 2.90
Philippines 46 2.75 Panama 46 1.65 Czech Republic 46 1.62 Korea, Rep. 46 2.86
Peru 47 2.73 Vietnam 47 1.65 Mexico 47 1.59 Colombia 47 2.81
Pakistan 48 2.69 Peru 48 1.63 Ukraine 48 1.56 Ukraine 48 2.77
Colombia 49 2.65 Thailand 49 1.60 Slovak Republic 49 1.51 India 49 2.72
Ukraine 50 2.62 Hungary 50 1.52 Vietnam 50 1.45 Philippines 50 2.65
Indonesia 51 2.61 Slovak Republic 51 1.46 Peru 51 1.45 Finland 51 2.58
Mexico 52 2.59 Kuwait 52 1.44 Indonesia 52 1.44 Nigeria 52 2.55
Nigeria 53 2.43 Romania 53 1.44 Argentina 53 1.40 Kazakhstan 53 2.55
Venezuela 54 2.40 Saudi Arabia 54 1.40 Colombia 54 1.35 Russian Federation 54 2.37
Hungary 55 2.21 Nigeria 55 1.25 Nigeria 55 1.21 Pakistan 55 2.32
Romania 56 2.11 Pakistan 56 1.25 Panama 56 1.11 Argentina 56 2.19
Russian Federation 57 2.05 Bangladesh 57 1.12 Bangladesh 57 1.01 Venezuela 57 1.97
1.1: The Financial Development Index 2010

Table 3: Financial stability: Top 20 economies limit their exposure to the global financial turmoil. As
described previously in this chapter, in some instances
2010
rank Economy Score financial stability may imply a tradeoff with healthy
1 Saudi Arabia 6.11 risk-taking or the efficient allocation of capital to the
2 Hong Kong SAR 5.75 highest-return investments. Also, notably, the risks that
3 Malaysia 5.68 can stem from a lack of financial development are
4 Singapore 5.66
broader in scope than financial crises or immediate
5 Switzerland 5.64
6 United Arab Emirates 5.48 financial instability. To illustrate this point further, we
7 Chile 5.38 will look at the relationship between economic growth
8 Norway 5.37 and financial development.
9 Australia 5.21
10 Brazil 5.15
11 France 5.13 Financial development and economic growth
12 Finland 5.09 In Figure 2, one sees a fairly strong correlation between
13 Canada 5.03 financial development and GDP per capita. As discussed
14 Slovak Republic 4.98
earlier in this chapter, the link between economic
15 Mexico 4.98
16 Morocco 4.95 growth and financial development is well established
17 China 4.93 in the academic literature.
18 Kuwait 4.91 A potentially more surprising finding can be
19 Belgium 4.83
observed when one considers the current global eco-
20 Peru 4.82
nomic environment. In the wake of the recent financial
crisis, many emerging-market economies have demon-
strated highly resilient and robust economic growth,
particularly when compared with that of developed
places, respectively) but do not make the top 10 in countries. The implication of this finding as it relates to
either the non-banking financial services pillar or the financial development can be seen in Figure 3. We have
financial markets pillar. Similarly, some emerging-market plotted the 57 countries covered by the Index in terms
14 economies achieve high scores in financial stability. In of the compound annual growth rate (CAGR) of their
Table 3 one sees that 8 of the top 20 economies in the GDP and their overall Index score. While the correla-
financial stability pillar are emerging markets. tion is not as tight as it is with GDP per capita, the basic
Many developing economies entered the recent conclusion is still obvious: many of the highest-growth
downturn with much stronger macroeconomic and economies also have the least-developed financial
financial fundamentals than they had in previous finan- systems.
cial crises. This included lower liability dollarization, The implication of this finding for individual coun-
lower fiscal and private debt, and a better aggregate tries is clear, and is one that this Report has aimed to
balance sheet for the financial services sector. For many address since its inception: countries must take a holistic
countries, such as Brazil, this was the result of effective approach in the assessment and improvement of their
macroeconomic and financial policy in the wake of past financial systems so they can continue to support eco-
crises, as well as generally favorable economic conditions nomic growth. Yet there are also broader implications for
that included higher commodity prices and strong capi- the global economy in light of the current fragile eco-
tal inflows in the period preceding the crisis. nomic recovery. In Figure 4 we have used IMF forecasts
However, it is important not to confuse financial of nominal GDP from 2010 to 2014 to create an esti-
stability as measured in the third pillar of the Index with mate of the absolute amount of GDP growth in emerg-
broader financial system development as measured in the ing markets (US$7.7 trillion) vs. advanced economies
overall Index. The broader Index looks at many different (US$6.5 trillion) over the next five years. By this rough
and often complex factors that support the long-term estimate, approximately 54 percent of global economic
development of the financial systems it assesses. Financial growth in the next five years could come from emerging
stability is only part of the assessment of how well markets. By contrast, the average FDI score for emerg-
financial systems in these countries contribute to overall ing markets is 3.16 vs. 4.45 for advanced economies.
economic growth by diversifying risks and efficiently Thus, in broadest terms the global economic recov-
allocating capital to those who most need it. Thus, we ery will be disproportionately affected by the perform-
see that many of those economies that do perform well ance of less-developed financial systems in emerging-
in the financial stability pillar do not perform nearly as market economies. Although many of these economies
well in other pillars in the Index. demonstrated a high degree of financial stability through
For some developing countries, which perform the recent financial crisis, there could be other potential
relatively well in this pillar but poorly in others, this risks for other aspects of their financial systems. A
result may represent the relative lack of integration and review of regional results of this year’s FDI suggests
development of their financial intermediaries, which what some of these risks might be.
1.1: The Financial Development Index 2010
Figure 2: GDP per capita vs. Financial Development Index 2010

R2 = 0.63
5
FDI 2010 score

2
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

GDP per capita 2009 (US dollars)

Source: GDP data taken from IMF, World Economic Outlook Database, April 2010.

15
Figure 3: 2005–09 GDP CAGR vs. Financial Development Index 2010 score

10

8
2005–09 GDP CAGR

R2 = 0.26
2

0
2 3 4 5 6

–2

Overall FDI score

Source: GDP data taken from IMF, World Economic Outlook Database, April 2010.
Note: CAGR = compound annual growth rate.
1.1: The Financial Development Index 2010

Figure 4: Absolute GDP growth vs. Financial Development Index 2010 score

l Average FDI score n Absolute GDP growth


$8 5
Absolute GDP growth (2010–2014, US$ trillions)

$7.7 trillion

4.45
4

Overall FDI score


$7

$6.5 trillion
3.16 3

$6

$5 1
Emerging markets Advanced economies

Source: GDP data taken from IMF, World Economic Outlook Database, April 2010.

16 Asian financial development and economic growth stimulus packages begin to subside. A lack of deep local
Figure 5 shows a summary of the performance of Asian bond markets could mean the absence of a critical
economies (excluding Japan) across the seven pillars of source of long-term financing.
the FDI. China, India, and Hong Kong are broken out Some of these weaknesses appear to translate into
separately, while the remaining Asian countries are aver- low scores for financial access in some Asian countries,
aged together, weighted by GDP. As a well-established because corporations indicate difficulty obtaining
global financial center, Hong Kong generally performs financing through the capital markets relative to loans or
significantly better than other countries. Financial sta- private credit. Retail financial access for consumers is
bility is commonly a relative strength for all these also an area of weakness for many of these economies.
economies. The ability of Asian economies to stimulate domestic
Some of the weaker pillar scores, however, begin to demand could be hindered by limited access to savings
reveal some potential risks that these financial systems and demand accounts, consumer credit, mortgages, and
might pose for economic growth, both in the region insurance. This in turn could affect the potential for
and globally. Relatively weak scores in the financial mar- Asian consumer demand to offset global economic
kets pillar and non-banking financial services pillar may imbalances that could threaten economic growth.
indicate an inability of capital markets to serve critical
financing needs in the future. In particular, scores in the Latin American financial development and economic
bond market subpillar were low in many of these coun- growth
tries. As the credit needs of companies in the region A summary of the performance of Latin American
continue to expand, the ability to tap local bond mar- countries across the seven pillars can be seen in Figure 6.
kets may become critically important. As described in Brazil and Mexico are broken out separately, while the
Chapter 1.2, deep local bond markets can also provide other Latin American countries are averaged together,
an important bulwark against volatile cross-border weighted by GDP. There appears to be a relatively high
capital flows. degree of uniformity in the performance of countries
Many Asian countries have highlighted the critical- across the pillars. As with the Asian economies, financial
ity of investing in infrastructure to support continued stability is a clear strength.
economic growth. In many of these economies, the abil- By contrast, performance in the financial markets
ity of banks to provide the tenor of financing needed to and non-banking financial services pillars is relatively
support long-term investments in infrastructure is lim- low. (Brazil scored higher than other countries in the
ited in the face of expanding need. Public investment non-banking financial services pillar because of a very
in infrastructure may also diminish as the provisions of high level of IPO activity.) The development of deep
1.1: The Financial Development Index 2010
Figure 5: Asian performance across pillars

7 n China
n India
6 n Hong Kong SAR
n Rest of Asia
5
FDI 2010 score

0
Pillar 1 Pillar 2 Pillar 3 Pillar 4 Pillar 5 Pillar 6 Pillar 7
Institutional Business Financial Banking Non-banking Financial Financial
environment environment stability financial financial markets access
services services

Note: Summary of results for Asian countries, excluding Japan. Rest of Asia consists of Bangladesh, Indonesia, Kazakhstan, Korea, Rep., Malaysia, Pakistan, the
Philippines, Singapore, and Vietnam, with results weighted by GDP.

Figure 6: Latin American performance across pillars 17

6 n Brazil
n Mexico
5 n Rest of Latin America
FDI 2010 score

0
Pillar 1 Pillar 2 Pillar 3 Pillar 4 Pillar 5 Pillar 6 Pillar 7
Institutional Business Financial Banking Non-banking Financial Financial
environment environment stability financial financial markets access
services services

Note: Rest of Latin America consists of Argentina, Chile, Colombia, Panama, Peru, and Venezuela, with results weighted by GDP.
1.1: The Financial Development Index 2010

local markets can be important to ensure that all sectors We provide further detail on these countries later in
within these economies are served. Research has shown this chapter, but highlight some general issues here to
that in the absence of deep local markets, there are seg- illustrate the broader risks that they might pose to global
ments of the economy, particularly SMEs, that may not economic growth. If the performance of these global
be able to access capital as easily as larger corporations.49 financial centers trends downward, it will heighten the
Given that on average SMEs contribute 29 percent to urgency of financial systems in emerging markets to
formal GDP in emerging markets, this could be a key provide the effective financial intermediation and access
constraint to economic growth in the region.50 to capital that supports economic growth. Additionally,
Similar to Asia, investment in infrastructure will be the global nature of these two financial centers means
essential to support the continued pace of economic that they can, in some respects, serve as bellwethers for
growth in Latin America. Local bond markets can pro- financial systems elsewhere. Regulatory consistency and
vide an important source of disciplined long-term coordination is more and more important in today’s
capital to augment funding by banks and national increasingly interconnected financial markets. If these
development banks such as BNDES (Brazilian pre-eminent global financial centers adopt policies that
Development Bank). are inconsistent with the long-term development and
Unlike Asian economies, Latin American economies improved performance of financial systems—or, con-
were not as weak in financial access as in the other pil- versely, if they fail to take needed actions—then their
lars. This was in part because of stronger scores with positive influence as models for financial systems else-
respect to retail finance. However, access to commercial where would be compromised.
finance proved weaker, particularly in Mexico where
severe constraints to many forms of capital—including
venture capital, private credit, loans, and equity markets— Regional analysis
exist. Although these Latin American economies exhibit While some high-level trends were highlighted earlier,
a high degree of financial stability, a limited availability it is at the country level that some of the potentially
of capital could pose a major risk to economic growth most useful findings from this Report can be seen. The
over the longer term. Country Profiles contained in Part 2 provide detailed
18 information with which to undertake this analysis. A
Financial development risks in the United States and summary of highlights drawn from these profiles is pre-
United Kingdom sented below by region.
The United States and United Kingdom hold the num-
ber one and two spots in the FDI rankings, respectively.
The score of the United States remains nearly stagnant
EUROPE AND NORTH AMERICA
and that of the United Kingdom actually goes down;
both countries’ performance is uneven across the differ- The United States achieves top standing in the
ent pillars. In Table 4 we have summarized the perform- Financial Development Index this year, although its
ance of these two global financial centers. As in past overall score does not change relative to 2009. The
years, their top rankings are driven primarily by robust United States continues to display a mix of contrast-
performances in financial intermediation; both show ing strengths and weaknesses across the seven pillars.
strength in non-banking financial services and financial Strengths exist in financial intermediation, particularly
markets, and the United Kingdom shows a continued with respect to non-banking financial services (1st) and
advantage in banking (which, as noted previously, financial markets (1st). This includes M&A activity (2nd)
includes measures of size and efficiency—financial and securitization (1st); the impact of the systemic risk
stability is captured elsewhere). potentially created by some of these activities is not cap-
Their solid performances in financial intermedia- tured in the non-banking financial services pillar, but
tion contrasts with weak scores in other areas—in rather in the financial stability pillar. The United States
Table 4 we have highlighted the pillars in which they has deep and active financial markets across the four
rank lower than 10. Financial stability remains a key types captured in the Index. Size is an important com-
concern for these countries, which rank toward the bot- ponent of performance across these markets, but indica-
tom of the Index. Other low scores indicate additional tors of activity such as stock market turnover (2nd),
areas that may be of concern over the longer term. The stock market value traded (2nd), and spot foreign
business environment in both countries has deteriorated, exchange turnover (2nd) are also strengths. Financial
in large part because of poor performance with respect stability continues to be an area of great challenge for
to taxation. Legal and regulatory issues are a drag on the the United States, where it achieves a low overall score
institutional environment in the United States, and rela- (39th). Particular weakness is evident in banking system
tively low efficiency pulls down banking performance in stability (52nd) and currency stability (41st) measures.
the country. The banking system in general also exhibits signs of
difficulty, with relatively low scores in size (19th) and
1.1: The Financial Development Index 2010
Table 4: Year-over-year changes in the Financial Development Index rank and score

UNITED KINGDOM UNITED STATES


2010 2009–10 2010 2009–10 2010 2009–10 2010 2009–10
FDI rank rank change FDI score score change FDI rank rank change FDI score score change

Pillar 1: Institutional environment 6 +9 5.79 +0.25 14 –3 5.58 –0.06


Pillar 2: Business environment 15 –3 5.45 –0.18 17 –7 5.37 –0.33
Pillar 3: Financial stability 46 –9 3.99 –0.58 39 –1 4.26 –0.30
Pillar 4: Banking financial services 1 +1 5.36 +0.03 27 –7 4.01 –0.20
Pillar 5: Non-banking financial services 2 –1 5.51 –0.85 1 +1 6.07 +0.14
Pillar 6: Financial markets 4 –2 5.02 –0.50 1 0 5.83 +0.18
Pillar 7: Financial access 10 +6 4.30 +0.28 5 +7 4.70 +0.51
Overall Index 2 –1 5.06 –0.22 1 +2 5.12 –0.01

Note: Data in blue bold indicate pillars where the rank is lower than 10.

efficiency (38th). Areas with a margin for improvement to financial stability, where it comes in 13th. The stabili-
in the business environment include the distortive effect ty of its banking system (8th) is a particular strength
of taxes and subsidies on competition (46th) and the within this pillar, although it is partially offset by an
quality of math and science education (30th). inferior performance in currency stability (37th). In
The United Kingdom falls to 2nd place in the terms of its institutional environment, Canada is consis-
Index, accompanied by a decrease in its overall score. tently solid across measures of corporate governance and
The country demonstrates contrasting strengths and financial sector liberalization. Potential areas of improve-
weaknesses in the pillars similar to the contrast seen in ment in the business environment pillar include the dis-
the United States. Its financial intermediation pillars tortive effect of taxes and subsidies on competition
show the greatest strength, offsetting drawbacks in other (23rd) and marginal tax variation (27th).
areas. The United Kingdom’s poor performance in The Netherlands rises one rank this year to 7th
financial stability (46th) is particularly driven by low place, delivering positive results across most of the FDI
scores in banking system stability (54th) and currency pillars. One clear area of weakness is demonstrated in 19
stability (45th). The country achieves top standing for the financial stability pillar (31st), where banking system
the size of its banking system, though it performs much stability exhibits a particularly poor performance (45th).
less well with respect to its efficiency (26th). Foreign The Netherlands scores high across all three of the
exchange (1st) and derivatives (1st) markets are areas of financial intermediation pillars: financial markets (8th)
particular strength within financial markets (4th). The and banking and non-banking financial services (2nd
United Kingdom came in 3rd with respect to insurance, and 9th, respectively). Within these pillars, the size of the
achieving high marks in indicators such as life (3rd) and Dutch banking system (3rd) is an apparent strength, as is
non-life insurance density (4th). M&A activity (1st) is an the robust nature of Dutch equity and bond markets
area of strength across measures of transaction value and (1st and 2nd). In addition to financial stability, a second
number of M&A deals; securitization is also quite strong area in need of improvement exists in the financial
(2nd). Although the UK institutional environment is access pillar, where the Netherlands performs relatively
fairly positive overall (6th), it demonstrates a need for poorly on measures of commercial access (35th).
improvement across areas related to regulation and cor- Neighboring Belgium has a weaker score in non-
porate governance; this includes the centralization of banking financial services (23rd), but outperforms the
economic policymaking (46th), the burden of govern- Netherlands in financial stability (19th) and financial
ment regulation (32nd), and the strength of auditing and access (3rd). Belgium’s strong standing in the latter pillar
reporting standards (14th). Taxation (29th) is also a par- particularly reinforces its overall rank of 10th place.
ticular area of difficulty, as indicated by the country’s Switzerland ranks 8th in the overall Index, with
high marginal tax rates and the distortive effect of taxes notably strong scores in business environment and finan-
and subsidies on competition. cial markets. Although the country feels the effects of
Canada maintains its 6th-place ranking in the FDI the recent crisis, it nonetheless performs very well with
with a solid performance across all pillars of the Index. respect to overall financial stability (5th). Potential areas
Non-banking financial services is a particular asset; of improvement within the Swiss institutional environ-
Canada comes in 3rd, showing strength across the meas- ment include contract enforcement and the extent of
ures of securitization, IPO, and M&A activity. The coun- financial sector liberalization. Robust equity (2nd) and
try also demonstrates a good performance in the other foreign exchange (5th) markets drive Switzerland’s
two financial intermediation pillars, banking financial strong performance in the financial markets pillar (3rd).
services (11th) and financial markets (12th). Despite its The size of its banking system is another source of
degree of economic integration with the United States, strength (7th), although opportunities for improvement
Canada continues to show clear divergence with respect
1.1: The Financial Development Index 2010

exist in its efficiency (23rd) and the degree of financial this pillar (35th) is particularly affected by limited IPO
disclosure (42nd). activity (48th).
France maintains its 11th place in the FDI, with Italy falls four positions in the rankings to 25th
solid scores across most of the pillars. Its financial mar- place this year, although this is accompanied by only a
kets take 7th place, with clear advantages across deriva- slight decline in its overall score. Its financial markets,
tives (1st), bonds (6th), and, to a lesser extent, foreign particularly its bond markets (7th), are an area of relative
exchange (9th). The country performs less well in bank- strength, while its disadvantages include issues of corpo-
ing financial services (23rd), primarily pulled down by rate governance (53rd), contract enforcement (53rd), and
the smaller size of its banking sector and the more lim- a relatively high risk of sovereign debt crisis (45th).
ited extent of financial information disclosure. France’s Italy’s level of financial access (25th) is fairly consistent
financial system shows a relatively high degree of sta- with its overall ranking, although this consistency does
bility through the recent crisis, yielding an 11th-place not appear across the access subpillars; the country’s pos-
ranking in this pillar. Corporate governance (23rd) rep- itive retail access to capital (11th) contrasts greatly with
resents one area for development within France’s insti- its very limited commercial access (54th).
tutional environment, while the country’s business The Czech Republic re-establishes itself at the
environment displays relative weaknesses in the cost top of the Eastern European countries covered by the
and time involved in registering property (44th and FDI, achieving 33rd place with a uniform performance
53rd). across most of the Index pillars. The Czech banking sys-
Sweden (12th) and Norway (15th) show similarity tem exhibits a notable degree of efficiency (17th) and
in their profiles with respect to strength in their institu- financial information disclosure (19th). Ukraine main-
tional and business environments, as well as in financial tains its standing as the lowest-ranked Eastern European
access. The countries diverge in the area of financial sta- country in the Index, although it does experience a
bility; Norway achieves a ranking of 8th place in this slight increase in overall score. Opportunities for improve-
pillar, bolstered in particular by a lower risk of sovereign ment exist across most aspects of its institutional envi-
debt crisis, while Sweden emerges at 27th place for ronment (55th) and financial stability (55th). A relatively
financial stability—weaknesses in the stability of high level of securitization activity (12th) emerges as a
20 Sweden’s banking system (43rd) primarily drive the benefit.
country’s standing in this pillar. The Russian Federation maintains its 40th rank
Germany falls by one rank to 13th place in this in the FDI, but demonstrates clear advantages in non-
year’s Index, a decline driven mainly by weakened banking financial services, including M&A (9th) and
financial stability (24th). Banks in Germany continue to securitization (4th) activity. The relatively small size of
face challenges with respect to efficiency, scoring a rela- Russia’s banking system combined with a significant
tively low 32nd place in this measure. In contrast, the level of inefficiency continue to pull down the country’s
country displays strength in its financial markets, ranking standing in the banking financial services pillar. Other
10th in this pillar. Additional areas of strength are seen areas in need of further development are seen across
in Germany’s institutional and business environments, much of its institutional environment (53rd) and in
specifically financial sector liberalization (1st) and infra- financial access (54th).
structure (4th). Potential development areas include for-
eign direct investment relative to GDP (50th) and easier
access to credit (49th). Germany’s equity markets (24th)
could also be further strengthened. Neighboring ASIA AND THE PACIFIC
Denmark takes 16th place, a drop of six places that is Countries in the Asia and Pacific region again show
accompanied by a decline in its overall score. The coun- a high degree of variation across the FDI rankings.
try’s institutional (4th) and business (6th) environments Hong Kong SAR establishes itself as the highest-
are advantages, driven primarily by solid scores in issues ranked economy in this region, achieving an overall
of regulation and governance as well as infrastructure. ranking of 3rd in the Index. The economy shows
Performance across the financial intermediation pillars is strengths across its institutional and business environ-
less strong, with limited IPO activity (49th) and Danish ments (10th and 3rd, respectively), as well as in the sta-
banks demonstrating an area for improvement in their bility of its financial system (2nd). Commercial access to
degree of financial information disclosure (52nd). capital represents another area of advantage where Hong
Austria and Finland follow each other in the rank- Kong achieves top standing and bolsters its 2nd-place
ings once again this year, at 19th and 20th places. Both ranking in the associated pillar, financial access. While
countries achieved high scores in their institutional and Hong Kong’s banking system is quite large and efficient,
business environments, and display weaknesses with respect the extent to which banks disclose financial information
to non-banking financial services. Austria’s 40th ranking (23rd) could be improved. The economy’s score in non-
in this pillar is driven heavily by relatively low securiti- banking financial services is negatively affected by lim-
zation activity (46th), while Finland’s performance in ited securitization activity (30th). In contrast to Hong
1.1: The Financial Development Index 2010
Kong’s healthy equity and foreign exchange markets, evident in its continued 12th-place ranking in the bank-
bond market development remains relatively undevel- ing pillar; a notable level of financial disclosure is a key
oped and represents an additional area for improvement. contributor to its standing here. Less-developed deriva-
Singapore follows Hong Kong in the rankings, tives and foreign exchange markets are potential areas of
maintaining its 4th-place ranking this year. In similar improvement for Malaysia’s financial markets (25th),
fashion to Hong Kong, Singapore demonstrates a strong although the country’s well-developed equity and bond
performance across the pillars pertaining to factors, poli- markets (15th and 16th) are a source of strength. An
cies, and institutions. In particular, the country achieves evaluation of financial access in the country presents a
top standing with respect to institutional environment, divergent picture at the subpillar level, where robust
an achievement mainly driven by effective contract commercial access to capital (9th) stands in contrast to
enforcement (1st) and a sound handling of legal and more limited retail access (25th).
regulatory issues (2nd). As is true in Hong Kong, banks In similar fashion to Malaysia, China (22nd) also
in Singapore are fairly sizeable (11th) and efficiently sees a notable rise in its standing in the FDI, moving up
operated (1st), but can improve upon the extent to by four positions. A limited degree of financial sector
which they disclose financial information (33rd). Bond liberalization (43rd) serves as a weakness in China’s
markets (22nd) represent an area for further develop- institutional environment, while the country’s business
ment within Singaporean financial markets. Singapore environment is particularly hampered by relatively poor
has a high level of commercial access to capital (2nd), infrastructure (47th). A highly stable currency and low
while retail access (15th) is more limited. risk of sovereign debt crisis contributes to the stability
Australia’s rank falls three positions to 5th place of China’s overall financial system (17th), despite a very
in the FDI, accompanied by a drop in its overall score. poor showing by the country’s banks with respect to
This decline is driven primarily by worsened perform- stability (50th). It is worth noting that implicit or
ance in the areas of taxation (20th) and currency sta- explicit government guarantees are not considered as
bility (42nd). Specific disadvantages in these two areas part of this measure. China’s non-banking financial serv-
include high marginal tax variation (30th) and a nega- ices also display strength across insurance (5th), IPO
tive current account balance relative to GDP (49th). (1st), and M&A (6th) activities; however, securitization
Nonetheless, these weaknesses are countered by the activity (45th) represents one area for further develop- 21
country’s continued strength in financial intermediation. ment. Despite its proximity to China, neighboring
Australia achieves solid scores in banking (7th) and non- Kazakhstan (49th) displays a differing set of strengths
banking (8th) financial services. The country’s financial and weaknesses than China. The country’s institutional
markets are also quite robust, although a less-developed environment (50th) and financial stability (49th) are
bond market serves as one weak spot in this pillar. weak but a relatively low cost of doing business (16th)
Australia’s top performance in retail access to capital serves as a bright spot in its business environment.
(1st) is accompanied by a fairly high level of commercial Further, Kazakhstan’s non-banking financial services
access to capital (11th), enabling Australia to achieve the are bolstered by considerable IPO and securitization
greatest level of overall financial access in the Index. activities.
Japan holds on to its 9th-place ranking in the Despite a slight increase in score, Korea declines in
Index for a second year. The country’s overall perform- the FDI by one position, assuming a ranking of 24th.
ance is driven primarily by strong results in financial The country’s non-banking financial services provide
intermediation. Japan’s banks are sizeable and relatively one clear advantage, driven by a sound insurance sector
efficient, bolstering its 5th place in the banking financial (7th) and robust securitization activity (3rd). Korea’s
services pillar. Similar strengths are seen across non- institutional environment (34th) is impacted by draw-
banking financial services such as M&A activity (4th) backs in corporate governance (42nd). In contrast, the
and insurance (2nd). Financial stability represents a dis- country’s fairly well developed business environment
advantage for the country, where a less stable banking (19th) is bolstered by the existence of solid infrastruc-
system (39th) and a fairly high risk of a sovereign debt ture (8th). Other key strengths include a healthy pool of
crisis (28th) pulls down the country’s score in this pillar. human capital, supported by a high tertiary enrollment
Commercial access to capital continues to not fully reap rate (1st) and quality of math and science education
the benefits of Japan’s strong financial intermediation, as (9th). Nonetheless, these competitive advantages are not
shown in the country’s ranking at 36th in this subpillar. fully reflected in financial access, as commercial access to
Malaysia (17th) rises an impressive five spots this capital in the country remains severely constrained
year, bolstered by significant increases in its scores within (51st).
financial stability (3rd) and non-banking financial ser- Thailand (34th) continues to display consistency in
vices (18th). Malaysia’s top standing in currency stability, its performance across most of the Index pillars. This year,
accompanied by a fairly stable banking system, serves the most salient shortcoming for Thailand’s financial sys-
as the foundation of a stable financial system (3rd). tem is its weak score in non-banking financial services
Malaysia’s strength as an Islamic banking center remains (49th), the result of very low levels of securitization
1.1: The Financial Development Index 2010

(54th) and M&A (42nd) activities. The stability of contrast to Pakistan’s 52nd place. This trend in perform-
Thailand’s currency (8th) stands out as one particular ance also emerges in measures of financial access, with
competitive advantage, although this is largely offset by a Indonesia and Bangladesh both showing broader access
less stable banking system (40th) and a fairly high risk of to capital in their financial systems than Pakistan (55th).
a sovereign debt crisis (32nd). The size of Thailand’s Further bright spots in the financial system of Indonesia
banking system (22nd) is partly countered by its lack of are the country’s significantly stable currency (6th) and a
efficiency (34th) and limited disclosure of financial fair degree of IPO (19th) and securitization activities
information (37th), demonstrating two additional areas (28th). Despite Pakistan’s previously mentioned chal-
in need of improvement for the country. Within finan- lenges in financial stability, the country does demon-
cial markets, the development of its bond markets (19th) strate a relatively stable currency (27th) and banking sys-
is an additional area of strength. tem (23rd). Bangladesh displays notable strength in its
Despite a slight decrease in overall score, India rises level of retail access to capital (20th), mainly attributable
one position in the Index to 37th place this year. The to the high penetration of microfinance lending in its
country remains strong in non-banking financial ser- financial system.
vices (13th), where it demonstrates significant IPO
activity (4th) and a well-developed insurance sector
(8th). Robust derivatives (13th) and foreign exchange
(13th) markets yield India’s relatively sound performance LATIN AMERICA
in financial markets (24th). The country’s institutional At 30th place, Chile achieves the highest score of
environment (51st) continues to be considerably weak- any Latin American country in the overall Index, mov-
ened by a low level of financial sector liberalization ing up one spot from its 31st-place ranking last year. It
(54th) and also by a poor degree of contract enforce- continues to score very well in the financial stability pil-
ment (52nd). India’s business environment (52nd) is hin- lar (7th), which is anchored by a high degree of banking
dered by an acute absence of adequate infrastructure system stability (2nd). Its solid scores across the institu-
(56th), a high cost of doing business (52nd), and issues tional (27th) and business (31st) environment pillars rep-
surrounding the administration of taxes (49th). These resent consistent scores across corporate governance
22 areas of difficulty translate into highly constrained finan- (21st), contract enforcement (24th), taxes (27th), and
cial access, a difficulty particularly evident in the case of human capital (26th) indicators. Financial intermedia-
retail access to capital (43rd). tion remains relatively weak in Chile, particularly in
Vietnam (46th) experiences the reverse of India’s financial markets (44th) and non-banking financial serv-
movement in the Index, falling one place in the rank- ices (37th), where diminished IPO and securitization
ings despite a slight increase in overall score. The coun- activity pull it down. Commercial access to capital is a
try’s banking system encompasses some areas of relative notable strength (8th), contrasting with its relatively
strength, performing fairly well with respect to size poor access to retail financial services.
(24th) and efficiency (35th) measures. Commercial Brazil moves up in the rankings two spots to reach
access to capital is a competitive advantage that drives 32nd place. Financial stability (10th) is a key strength for
Vietnam’s 18th position in the overall financial access Brazil; this is underpinned by robust currency and bank-
pillar. ing system stability, but it contrasts with the country’s
The Philippines (50th) maintains its ranking in the relatively higher risk of sovereign debt (42nd). Non-
Index this year, but demonstrates an improvement in its banking financial services is also an advantage for Brazil,
scores across most of the FDI pillars. It continues to where it ranks 12th. A high degree of IPO activity is a
benefit from a relatively high degree of currency stabili- key driver of this result, as are, to a lesser extent, healthy
ty. The country has made strides with respect to finan- insurance markets and M&A activity. Inefficiency within
cial intermediation, and its performance here is particu- Brazil’s banking system pulls down its score here (38th).
larly driven by a fairly high degree of M&A (25th) and Despite Brazil’s financial stability, its institutional envi-
securitization (20th) activities, as well as relatively well ronment does not perform as well (44th)—this is weak-
developed bond markets (20th). Further improvement is ened in particular by legal and regulatory issues such as
necessary in order to fully translate these strengths into its extremely high burden of government regulation
broad financial access (50th). (57th), lack of trust in politicians (52nd), and poor pro-
Indonesia (51st), Pakistan (54th), and Bangladesh tection of legal rights (50th). Its business environment
(55th) round out the Asian countries in the FDI, all (48th) has a poor showing as well, exhibiting a high cost
falling within the bottom 10 countries of the Index. All of doing business compounded by a burdensome and
three face challenges across much of their respective distortive tax regime (52nd).
business environments, weighing down their perform- Panama’s rank drops significantly this year, from
ances in this pillar. Indonesia and Bangladesh fare better 29th to 39th place. A fall in the country’s score with
than Pakistan with respect to financial stability, with the respect to financial access from 17th to 32nd contributes
first two countries achieving ranks of 36th and 30th, in to this decline, which resulted in particular from lower
1.1: The Financial Development Index 2010
retail access to financial services (39th). By contrast, to both countries taking the two lowest scores in finan-
Panama scores well with respect to commercial access, cial access.
coming in at 5th place. Diminished performance in
financial stability is precipitated by weaker scores in
banking system stability (25th) and low scores in capital
adequacy (39th) and the financial strength of banks MIDDLE EAST AND NORTH AFRICA
(41st). Outside of stability measures, however, Panama At 21st, the United Arab Emirates scores the
scored quite well in banking financial services (25th), a highest of all Middle Eastern and North African coun-
result that stems from the size (18th) and efficiency tries in the FDI, falling one notch from the previous
(27th) of its banks. year. Its 6th-place ranking in financial stability is driven
Mexico maintains the same rank as last year, 43rd by the stability of its banking system (4th), offsetting its
place, with scores that do not change significantly across weaker scores for the risk of sovereign debt crisis (29th)
the seven pillars of the Index. Financial stability (15th) as manifested particularly in credit default swap spreads
remains a crucial strength, particularly in terms of bank- (46th). The institutional (23rd) and business environ-
ing (12th) and currency (17th) stability. However, ments (21st) are advantages, with solid scores across a
although Mexico’s banking system is stable, it still does number of measures such as legal and regulatory issues
poorly in terms of size (53rd) and efficiency (50th). Its (20th), corporate governance (20th), and infrastructure
financial markets performed only marginally better, with (25th). The tax regime (6th) is also especially favorable,
strength in its foreign exchange (23rd) contrasting with as it poses little administrative burden and has few dis-
its relatively weaker equity markets (47th). Related to tortive effects. The United Arab Emirates has solid
this, commercial access to capital appears to be a weak scores in most areas of financial intermediation, though
point (52nd) while retail financial access appears strong financial disclosure appears to be a weak point (41st).
(23rd). Legal and regulatory issues and corporate gover- Financial access is quite strong for both corporate (10th)
nance remain major constraints to the development of and retail (12th) end-users.
Mexico’s institutional environment (48th). Bahrain comes in at 23rd in the FDI, rising four
Colombia and Peru come in 47th and 48th in the places since 2009. Similar to the United Arab Emirates,
rankings, respectively. Like many other Latin American its business environment (14th) is a strong advantage, 23
countries, Peru demonstrates a high degree of financial with a highly favorable tax regime (1st) and a low cost
stability (20th); Colombia’s performance in this area is of doing business (10th). An increase in financial stability
not as high (34th). The low cost of doing business in (23rd) is a key contributor to its increase in the overall
Colombia (19th) contributes to a relatively strong busi- score, particularly in the areas of banking system stability
ness environment (36th), and heightened IPO activity (3rd) and risk of sovereign debt crisis (22nd). This con-
buoys its performance in non-banking financial services trasts a relatively low score for currency stability. In
(25th). In most of the other dimensions of the Index— addition to being stable, its banking system is fairly effi-
including financial markets (54th for Colombia and 51st cient (14th), though financial disclosure could be better
for Peru), banking financial services (Columbia at 49th (36th). Non-banking financial services (38th) and finan-
and Peru at 47th), and the ability of companies and con- cial markets (42nd) do not perform as well, which cor-
sumers to access capital and financial services (Colombia responds to the difficulty that firms have in obtaining
at 47th and Peru at 44th)—neither Columbia nor Peru financing through local equity markets (35). The ability
score particularly well. of firms to access capital through loans (1st), private
Argentina and Venezuela round out the Latin credit (12th), and foreign direct investment (11th)
American rankings with 52nd and 56th place, respec- appears to offset this difficulty, resulting in a commercial
tively. The legacy of banking system instability and sov- access score of 6th place.
ereign debt crises continues to weigh heavily on the The financial system of Saudi Arabia earns it 26th
stability of Argentina’s financial system (54th). Venezuela place in the FDI and demonstrates some similarities to
performs better with respect to financial stability (40th), those of Bahrain and the United Arab Emirates. It is
but its low performance in all other dimensions of the highly stable (1st) across its banking system (1st) and
Index indicate that this may be the result of the lack of currency (5th), with a low risk of sovereign debt crisis
dynamism in its financial system. Non-banking financial (6th). Similar to its neighbors, it has a healthy business
services (25th) is a bright spot for Argentina, stemming environment both in terms of its tax regime (5th) and
in part from a high degree of securitization activity low cost of doing business (9th). However, it lags in
(7th). Issues such as corruption, poor protection of terms of human capital (33rd) and infrastructure (34th).
property rights, and inadequate economic policymaking Its non-banking financial services (54th) performance is
contribute to poor institutional environments in both particularly weak across IPOs, M&A, insurance, and
Argentina (52nd) and Venezuela (57th). An inability of securitization. Its banks are not particularly large (37th)
businesses to access various forms of financing contributes and its financial disclosure is relatively weak (43rd).
1.1: The Financial Development Index 2010

Despite these drawbacks, corporate end-users report an


SUB-SAHARAN AFRICA
ease of access to nearly all forms of financing.
Israel demonstrates generally solid scores across all South Africa is one of two sub-Saharan African
pillars of the Index to earn its ranking of 27th place in countries covered in the Index. It advances one spot in
the FDI. Its solid performance in its institutional envi- the FDI this year, to reach 31st place. The strength of its
ronment (19th) is consistent with similar scores in com- insurance sector, particularly life insurance coverage and
ponent subpillars, such as corporate governance (25th) density, contributes to the healthy performance of its
and legal and regulatory issues (19th). Its business envi- non-banking financial services sector (19th). Its banks
ronment is less strong (33rd), pulled down in particular (31st) and financial markets (27th) also show solid
by a high cost of doing business. While low levels of scores, an outcome in line with the country’s overall
securitization (55th) and M&A activity are a drag on its score. On the strength of its financial intermediation,
non-banking financial services score (31st), commercial commercial access is reported to be good (21st), yet
access to financial services remains relatively strong retail access measures are not as robust (37th). South
(21st); the availability of venture capital is a particular Africa’s business environment is also an area of weak-
strength (8th). ness, particularly in areas such as human capital (52nd)
In contrast to Israel, Kuwait (28th) shows a bit and infrastructure (49th).
more variation in performance across the pillars in the The second sub-Saharan African country represent-
Index. Currency stability and a low risk of sovereign ed in the Index, Nigeria, comes in lowest of all coun-
debt crisis underpin a strong score in financial stability tries, at 57th place. Commercial access to financial
(18th). The country’s institutional environment is less services (31st) is an area of strength for the country,
favorable (37th), and is compromised by issues such as particularly with its very strong foreign direct invest-
fairly weak corporate governance (39th), uncoordinated ment (5th). There are also some bright spots in its
economic policymaking (49th), and a lack of domestic institutional environment, notably the openness of its
financial sector liberalization (41st). Its equity markets financial sector (34th) and contract enforcement (39th).
appear robust (12th), but non-banking financial services However, corporate governance (52nd) and legal and
such as insurance (55th) scored near the bottom of the regulatory issues (51st) weigh down its performance
24 entire Index. here, and its business environment overall is considered
Jordan drops four places in the FDI this year, to extremely poor (56th). It is worth noting that data avail-
29th place, from the result of lower scores in several pil- ability issues affect the composition of variables con-
lars. A decline in the relative efficiency of its banks tributing to Nigeria’s financial stability score, a circum-
reduces its banking financial services score to 26th place, stance that contributes to its drop in score in this area.
down 11 places from 15th place last year. Its business
environment (43rd) also deteriorates somewhat in areas
such as taxation (33rd) and human capital (40th). Conclusion
Declining scores in financial intermediation parallel a Given the depth of the recent financial crisis, it is
significant drop in commercial access (20th). The avail- tempting to view financial development in terms of
ability of data this year for certain variables that were preventing the harmful effects of financial instability.
not included last year—such as life insurance and access However, financial development must be viewed more
to ATMs—exerted some downward pressure on scores broadly in order to identify and address weaknesses
in these pillars. across the broader dimensions of financial systems that
The two North African countries covered in the could be the greatest threats to economic growth in the
FDI, Egypt and Morocco, score similarly in the FDI years ahead; this includes the need to provide long-term
this year, at 38th and 41st place, respectively. Egypt’s financing for infrastructure development, to improve
financial stability advances from 45th place last year to local bond markets so that they are a consistent source
35th this year, a result driven especially by gains in cur- of capital for all segments of the economy, and to
rency and banking system stability. This is balanced by improve retail financial access as an enabler of consumer
an opposite decline in financial access, from 11th to 21st demand. While acknowledging the importance of finan-
place, as firms report increased difficulty in obtaining cial development for sustained global economic growth,
loans and private credit. Morocco was added to the FDI we must recognize that improvements must come at
this year. Although its institutional environment is weak the local level through the rigorous prioritization and
(40th), its financial system is stable at 16th place. Its implementation of reforms.
financial markets (45th) and non-banking financial serv- The Country Profiles and Data Tables in this Report
ices (42nd) are not particularly strong, but its banks are contain a wealth of data that can be a useful starting
efficient (22nd) and relatively large (26th) in relation to point to inform this analysis. These data are presented
GDP. within a transparent and comprehensive framework that
encourages breadth of analysis within countries and
the benchmarking of performance across them. The
1.1: The Financial Development Index 2010
framework is necessarily limited by the data that are 28 De la Torre et al. 2010.

available for the countries covered in the Index and its 29 Rojas-Suarez 2003.
findings should be scrutinized and where appropriate, 30 Goldsmith 1969.
challenged. However, we believe the advantages of 31 Ito and Chinn 2007.
bringing together such a comprehensive amount of data
32 Levine 2004.
in a structured and accessible way far outweigh these
33 That such channeling and efficient allocation occurs is emphasized
limitations. We hope that this Report broadens and based on two premises: (1) financial intermediaries provide liquidi-
sharpens the perspective of those who are working to ty, and (2) financial intermediaries are capable of altering the riski-
ness of assets; see Claus and Grimes 2003.
harness the full potential of financial systems to promote
global economic growth and individual welfare. 34 Gerschenkron 1962, in addition to others, asserts that banks
finance growth in a more effective and efficient way than market-
based systems, particularly in underdeveloped economies where
non-bank financial intermediaries are generally less sophisticated.
Notes 35 Rajan and Zingales 2001.
1 Eichengreen et al. 2009.
36 Levine 1997, 2001.
2 Rajan 2010.
37 Barth et al. 1999.
3 Khan and Senhadji 2000.
38 Vittas 1998.
4 Schumpeter (1912) held that financial intermediaries select the
firms that utilize an economy’s savings. More formally, his view 39 Demirgüç-Kunt and Levine 2001.
stipulated that financial intermediaries tend to adjust the process 40 Noyer 2006.
of savings allocation rather than alter the savings rate itself. Thus,
Schumpeter’s notion of finance and development focuses on the 41 Lin 2007.
effect of financial intermediaries on productivity growth and the
rates of technological change. 42 Carmichael and Dissou 2000.

5 For a detailed review of the literature on finance and growth, see 43 Levine and Zervos 1996 employed several indicators for stock
Levine 2004. markets spanning size (market capitalization ratio) and liquidity
(stock market turnover and stock market value traded both as
6 Kannan 2010. shares of GDP).

7 Ranciere et al. 2008. This research does not suggest that financial 44 Arestis et al. 2001.
crises are good for economic growth. Rather, it suggests that the
45 Demirgüç-Kunt and Levine 2001.
systemic risk taking that overcomes financial bottlenecks to eco- 25
nomic growth is associated with occasional financial crises. 46 Fink et al. 2003.
8 Michalopoulos et al. 2009 47 See http://imf.org/external/np/speeches/2007/082207.htm.
9 Feyen 2009. 48 Beck et al. 2006.
10 Levine 2004. 49 De la Torre et al. 2006.
11 La Porta et al. 1997, 1998b, 1999b,; Levine 1998, 1999; and Barth 50 Ayyagari et al. 2007.
et al. 1999.

12 Bekaert and Harvey 2005 also held explicitly that reforms that
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1.1: The Financial Development Index 2010

Appendix A: Structure of the Financial Development Index 2010

This appendix presents the structure of the Financial financial markets pillar, a 30 percent weight was assigned
Development Index (FDI). to the equity and bond market subpillars, and a 20 per-
The numbering of the variables matches the num- cent weight was assigned to the foreign exchange and
bering of the data tables. The number preceding the derivatives market subpillars. This was done to signify
period indicates to which pillar the variable belongs the relatively greater importance of equity and bond
(e.g., variable 1.01 belongs to the first pillar). market development.
The indicators from sources other than the For many variables, especially those related to the
Executive Opinion Surveyused in the FDI are normal- size and depth of the financial system, scaling by GDP
ized on a 1-to-7 scale in order to align them with the was deemed necessary to control for country size.
Executive Opinion Survey’s results.1 The Technical Scaling by GDP also allows for more relevant cross-
Notes and Sources at the end of this Report provide country comparisons.
detailed information on all of these indicators.
In some instances, the interaction among different
variables was also captured, because certain variables can Index structure
be considered more beneficial in the presence of others. The percentage next to each category in the list below
For instance, the effect of liberalizing the capital account represents the category’s weight within its immediate
and the domestic financial sector has been found in parent category. The computation of the FDI is based
empirical studies to be mixed, yielding both positive and on successive aggregations of scores, from the variable
negative results. However, the presence of a strong legal level (i.e., the lowest level) all the way up to the overall
and regulatory environment and a developed bond mar- FDI score (i.e., the highest level), using the weights
ket tends to mitigate the negative effects of the liberal- reported below. For example, the score a country
ization process. To account for this, the scores of the achieves on the bond market development subpillar
capital account liberalization, commitments to WTO comprises 30 percent of the country’s financial markets
agreement on trade in services within the financial serv- pillar (VI) score. Likewise, the score a country achieves
28 in the 5th pillar accounts for 14.29 percent of the FDI
ices sector, and domestic financial sector liberalization
indexes were adjusted. Any economy with standardized score.
scores above the average for the legal and regulatory A dynamic weighting regime removes individual
environment and bond market development experi- variables from the subpillar and pillar calculations when
enced positive effects as a result of the liberalization no data are present. The weight normally attributed to a
process, while the opposite is true for countries with particular variable will be spread among variables for
scores lower than these averages.2 which data are present. Therefore, the actual weight for
each variable by country may not be exactly as noted.

Weighting and scaling of variables 1st pillar: Institutional environment .................14.29%


One of the key design principles of the Index is the A. Financial sector liberalization ......................25.00%
inclusion of the breadth of variables relevant to the 1.01 Capital account liberalization
financial development of both emerging and developed 1.02 Commitments to WTO agreement on trade in
economies. Given the emphasis placed on the compo- services
nent parts of the Index as a framework for analysis, we 1.03 Domestic financial sector liberalization

have taken a very conservative approach to the weight- B. Corporate governance ..................................25.00%
1.04 Extent of incentive-based compensation
ing of variables. We have generally weighted different
1.05 Efficacy of corporate boards
components of the Index equally. 1.06 Reliance on professional management
In some instances, there was sufficient cause to 1.07 Willingness to delegate
assign different weights to the subpillars within the 1.08 Strength of auditing and reporting standards
Index. Within the financial stability pillar, banking sys- 1.09 Ethical behavior of firms
tem stability is weighted more (40 percent) than curren- 1.10 Protection of minority shareholders’ interests

cy stability and risk of sovereign debt crisis (30 percent C. Legal and regulatory issues .........................25.00%
1.11 Burden of government regulation
each). Within the banking financial services pillar there
1.12 Centralization of economic policymaking
are three subgroups: the size of the banking system, the 1.13 Regulation of securities exchanges
efficiency of the banking system, and the role of finan- 1.14 Property rights
cial information disclosure. The first two variables were 1.15 Intellectual property protection
weighted 40 percent each in this pillar, while the last 1.16 Diversion of public funds
variable was weighted at 20 percent, thus placing more 1.17 Public trust of politicians
1.18 Corruption perceptions index
importance on the size and efficiency of the banking
1.19 Strength of legal rights index
system than on the role of disclosure. Within the 1.20 Central bank transparency
1.1: The Financial Development Index 2010
Appendix A: Structure of the Financial Development Index 2010 (cont’d.)

D. Contract enforcement...................................25.00% 4th pillar: Banking financial services...............14.29%


1.21 Effectiveness of law-making bodies
A. Size index.......................................................40.00%
1.22 Judicial independence
4.01 Deposit money bank assets to GDP
1.23 Irregular payments in judicial decisions
4.02 Central bank assets to GDP
1.24 Time to enforce a contract
4.03 Financial system deposits to GDP
1.25 Number of procedures to enforce a contract
4.04 M2 to GDP
1.26 Strength of investor protection index
4.05 Private credit to GDP
1.27 Cost of enforcing contracts
4.06 Bank deposits to GDP
4.07 Money market instruments to GDP
2nd pillar: Business environment ......................14.29% B. Efficiency index..............................................40.00%
A. Human capital ...............................................25.00% 4.08 Aggregate profitability indicator
2.01 Quality of management schools 4.09 Bank overhead costs
2.02 Quality of math and science education 4.10 Public ownership of banks
2.03 Extent of staff training 4.11 Bank operating costs to assets
2.04 Local availability of specialized research 4.12 Non-performing bank loans to total loans
and training services C. Financial information disclosure..................20.00%
2.05 Brain drain and ease of hiring foreign labor 4.13 Private credit bureau coverage
2.06 Tertiary enrollment 4.14 Public credit registry coverage
B. Taxes ...............................................................25.00%
2.07 Irregular payments in tax collection
5th pillar: Non-banking financial services ......14.29%
2.08 Distortive effect on competition of taxes
and subsidies on competition A. IPO activity.....................................................25.00%
2.09 Marginal tax variation 5.01 IPO market share
2.10 Time to pay taxes 5.02 IPO proceeds amount
5.03 Share of world IPOs
C. Infrastructure .................................................25.00%
2.11 Quality of overall infrastructure B. M&A activity ..................................................25.00%
2.12 Quality of telephone infrastructure 5.04 M&A market share
5.05 M&A transaction value to GDP 29
2.13 Internet users
2.14 Broadband Internet subscribers 5.06 Share of total number of M&A deals
2.15 Telephone lines C. Insurance ........................................................25.00%
2.16 Mobile telephone subscribers 5.07 Life insurance density
D. Cost of doing business .................................25.00% 5.08 Non-life insurance density
2.17 Cost of starting a business 5.09 Real growth of direct insurance premiums
2.18 Cost of registering property 5.10 Life insurance coverage
2.19 Cost of closing a business 5.11 Non-life insurance coverage
2.20 Time to start a business 5.12 Relative value-added of insurance to GDP
2.21 Time to register property D. Securitization.................................................25.00%
2.22 Time to close a business 5.13 Securitization to GDP
5.14 Share of total number of securitization deals

3rd pillar: Financial stability...............................14.29%


A. Currency stability ..........................................30.00% 6th pillar: Financial markets...............................14.29%
3.01 Change in real effective exchange rate (REER) A. Foreign exchange markets...........................20.00%
3.02 External vulnerability indicator 6.01 Spot foreign exchange turnover
3.03 Current account balance to GDP 6.02 Outright forward foreign exchange turnover
3.04 Dollarization vulnerability indicator 6.03 Foreign exchange swap turnover
3.05 External debt to GDP (developing economies) B. Derivatives markets ......................................20.00%
3.06 Net international investment position to GDP 6.04 Interest rate derivatives turnover: Forward rate
(advanced economies) agreements
B. Banking system stability ..............................40.00% 6.05 Interest rate derivatives turnover: Swaps
3.07 Frequency of banking crises 6.06 Interest rate derivatives turnover: Options
3.08 Financial strengths indicator 6.07 Foreign exchange derivatives turnover: Currency
3.09 Aggregate measure of real estate bubbles swaps
3.10 Financial Stress Index 6.08 Foreign exchange derivatives turnover: Options
3.11 Tier 1 capital ratio C. Equity market development.........................30.00%
3.12 Output loss during banking crises 6.09 Stock market turnover ratio
C. Risk of sovereign debt crisis ........................30.00% 6.10 Stock market capitalization to GDP
3.13 Local currency sovereign rating 6.11 Stock market value traded to GDP
3.14 Foreign currency sovereign rating 6.12 Number of listed companies per 10,000 people
3.15 Aggregate macroprudential indicator
3.16 Manageability of public debt
3.17 Credit default swap spreads (Cont’d.)
1.1: The Financial Development Index 2010

Appendix A: Structure of the Financial Development Index 2010 (cont’d.)

D. Bond market development ..........................30.00%


6.13 Private domestic bond market capitalization to GDP
6.14 Public domestic bond market capitalization to GDP
6.15 Private international bonds to GDP
6.16 Public international bonds to GDP
6.17 Local currency corporate bond issuance to GDP

7th pillar: Financial access.................................14.29%


A. Commercial access .......................................50.00%
7.01 Financial market sophistication
7.02 Venture capital availability
7.03 Ease of access to credit
7.04 Financing through local equity market
7.05 Ease of access to loans
7.06 Foreign direct investment to GDP
B. Retail access ..................................................50.00%
7.07 Market penetration of bank accounts
7.08 Commercial bank branches
7.09 Total number of ATMs
7.10 Total number of point of sale (POS) devices
7.11 Microfinance institution (MFI) borrowers’ penetration
rate

Notes
30 1 See Browne and Geiger 2009. The standard formula for converting
hard data is the following:

(country score – sample minimum)


6 x + 1
(sample maximum – sample minimum)

The sample minimum and sample maximum are, respectively, the


lowest and highest country scores in the sample of countries cov-
ered by the FDI. In some instances, adjustments were made to
account for extreme outliers. For those hard data variables for
which a higher value indicates a worse outcome (e.g., Frequency
of banking crises, Entry restrictions for banks), we rely on a nor-
malization formula that, in addition to converting the series to a
1-to-7 scale, reverses it so that 1 and 7 still corresponds to the
worst and best possible outcomes, respectively:

(country score – sample minimum)


–6 x + 7
(sample maximum – sample minimum)

2 The average score for the legal and regulatory environment was
4.07. The average score for the bond market development was
3.07.
1.2: Financial Development, Capital Flows, and Capital Controls
CHAPTER 1.2 Of globalization’s many features, capital flows are among
the most controversial and least clearly understood. A
great deal of good academic work has gone into the
Financial Development, Capital subject, and yet there is no conclusive agreement on
their universal benefit or harm. This is little consolation
Flows, and Capital Controls to policymakers and industry practitioners who have to
work with both the beneficial aspects and the potential
HOWARD DAVIES, London School of Economics dangers of global capital flows. We therefore offer a
MICHAEL DREXLER, Barclays Capital practical view here to complement the body of academic
research.
After an overview of capital flows and their poten-
tial benefits and dangers, this chapter is split into two
major parts. The first part discusses development of
local financial markets and suggests measures from the
Financial Development Index that can be helpful in
assessing the vulnerability of a local economy to specu-
lative flows. Although it is by no means an exact science,
this assessment should give policymakers and private
actors suggestions on where to look for potential fault
lines.
The second part of the chapter offers a decision-
making framework that can be used when a local
economy is affected by excessive capital flows to the
unfortunate extent that policymakers see no other
option than to consider capital controls. While we
would not endorse such measures per se, it is clear to
us that in practice there may be circumstances in which 31
they are the least bad option. In such a case, we would
advocate that measures be implemented in a rational
and deliberate way rather than in the haphazard fashion
that has often be seen hitherto.

Overview
Capital flows have long been a debated feature of glob-
alization. According to classic economic theory, they go
hand in hand with efficient resource allocation, flowing
from developed economies (which have a capital sur-
plus) to developing markets (which have a surplus of
investment opportunities). In developing markets, they
enable the financing of projects with a high marginal
return that foster future economic growth, thus benefit-
ting the world economy as a whole as well as the local
economy.
However, it is hard to reconcile this theoretical
picture with economic reality. The private inflows to
emerging and developing economies shown in Figure 1
demonstrate clear evidence of “animal spirits” at
work1—both in 1998–2002 when the dot-com bubble
crowded out emerging-market investments and in
2003–07 when an increasing amount of global surplus
capital was looking for attractive yield.
The picture gets even more complicated when
looking at subsets of the data, as evident in Figure 2,
which depicts only private flows to developing markets
in Asia. The well-studied reversal of private flows during
the Asian crisis is clearly evident. However, even direct
1.2: Financial Development, Capital Flows, and Capital Controls

Figure 1: Historical development of emerging market capital flows

700

600

500
US$ billions

400

300

200

100

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(f)

Net private inflows to emerging and developing economies

Source: IMF World Economic Outlook Database, August 2010.

32
investment, long held up as a steady source of “good” animal spirits notwithstanding). The more transactional
flows, shows extraordinary growth in the years 2005–08 financial flows facilitate trade and payments, the more
and then contracts to half its 2008 value one year later. they enable what has been recently termed the “real
It is almost certain that this decrease will not have been economy” on a global basis. Finally, by way of lending,
caused by a sudden lack of decent investment opportu- they can provide liquidity and financing where needed—
nities in the region. augmenting the work of governments and the multilat-
Research has also found that capital has recently eral institutions that would otherwise have to carry out
flowed in the opposite direction from that forecast by this function alone.
classic theory—that is, capital flows have gone from So, accepting that capital flows are an integral part of
emerging economies, such as China and the Middle the global economic system as we know it, the question
East, to developed markets such as the United States. In becomes one of how to harness their inherent positives
the process, the flows have inflated asset bubbles and, (as outlined in the previous paragraph) while mitigating
according to some commentators, played a significant their potential negatives.
role in the recent financial crisis.2 While we acknowledge the relevance of global
Finally, the orthodox economic view is further imbalances and related capital flows to the recent
challenged by the lack of a conclusive causal link crisis—particularly their role in creating bubbles in some
between capital account liberalization and economic developed economies (mostly centered around real
development.3 While many authors agree that an open estate)—we consider this to be less pertinent in the con-
capital account affords some benefits (potentially of a text of this Report. By definition, and evidenced by their
secondary or collateral nature), it is clearly not the scores, those economies do not face a development
panacea for economic welfare that classic theory would challenge that could be disrupted by capital flows. Both
suggest. their size and their regulatory framework enable them
to deal with potentially destabilizing bubbles should
Beyond economic fundamentalism they choose to.
Setting aside the theoretical debate, it is clear that capital
flows are a feature of a globalized economy, and that The impact of capital flows on developing economies
they offer a priori benefits worth preserving. They allow We are therefore more concerned with the effects that
investors to express an opinion on a global portfolio of private capital flows can have on smaller economies that
opportunities, and therefore promote price discovery are still in development. A country with a GDP of less
and the long-term allocation of resources (short-term than US$30–40 billion, such as Cambodia or Latvia,
1.2: Financial Development, Capital Flows, and Capital Controls
Figure 2: Historical development of private flows to developing Asia

200
n Direct investment, net
n Other private financial flows
150

100

50
US$ billions

–50

–100

–150

–200
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(f)

Private financial flows to developing Asia

Source: IMF World Economic Outlook Database, August 2010.

33
could easily be overwhelmed by the concerted actions that lead to inefficient allocation of resources or a
of only a few investors. It is this problem that should be lack of economic discipline,
of most concern when thinking about financial devel-
opment, as such action could seriously damage a local • currency mismatches, and
market for years if not decades, causing significant eco-
nomic hardship in the process. • maturity or liquidity mismatches.
The World Economic Forum has convened the
Global Agenda Council on Global Investment Flows to It is the latter two that cause the most dramatic
discuss this particular issue. Council members represent dangers. One need look no further than the Asian crisis
the private sector, academia, and the public/not-for- of 1997 or, more recently, the experiences of countries
profit sector.4 While the Council’s work and delibera- such as Hungary. The “hot” foreign money is welcome
tions over the last two years were instrumental in at first, as it comes on cheaper terms than the historical
creating this chapter, it does not necessarily represent cost of capital in the local economy.5 Often at this stage,
the opinion of every Council member (or their insti- the potential future traps are either overlooked or
tutions). rationalized away (for example, currency risk is ignored
because of a perceived convergence or a “bulletproof ”
peg). Only at a later stage, when flows materially
Capital flows and financial development change, do the dangers come to the fore. At that stage, a
It is clear that capital flows can have an enormous buildup of systemic risk often compounds the issue, and
impact on financial development. This section will an implicated banking system might need rescue. This
explore a framework for how economies can assess vul- exacerbates the already-considerable strain on both local
nerabilities to the negative aspects of capital flows. economy and government finance and default becomes
a possibility, with the specter of a significantly higher
Rational defenses against imported irrational exuberance cost of funds for a long time to come. Economic devel-
Capital flows that are large with regard to a local econo- opment, seemingly turbo-charged through the period of
my generally bring three dangers: hot money inflows, is now impaired for the long term.
In principle, the remedies against the dangers out-
• inflation of bubbles (this is generally linked to hard lined above are not complex, and they are well docu-
assets such as property, but also company valuations) mented by both reason and empirical research. These
include:
1.2: Financial Development, Capital Flows, and Capital Controls

Figure 3: Suggested sequence to building resilience against excessive capital flows

Vigilant Strong Well-developed Deep local Other


and competent local investor local credit currency asset
regulator base markets markets markets

• deep local asset markets (e.g., equity, real estate) more vulnerable to the detrimental effects of hot money.
with appropriate macro-prudential supervision to Even worse, they may attract the first wave of specula-
mitigate boom-and-bust cycles, particularly where tive money through their highly visible equity markets.
excessive credit extension is concerned; The usual sequence of events for such markets is that
speculative money first drives up the local stock market;
• deep local currency markets, both spot and deriva- once valuations have become exorbitant, it seeks other
tives, to allow for hedging and sterilization of for- routes to get exposure to the local economy—frequently
eign currency exposures; and through foreign-denominated high-yield debt at short
maturities (as was the case in the Asian crisis). That
• well-developed local debt markets, offering depth debt, in the absence of local bond markets, is channeled
across the whole yield curve (to combat excessive through local banks, which—conveniently for foreign
34
buildup of short-term debt). Depth in local curren- investors—carry an implicit guarantee because of their
cy bonds is particularly preferable, as it prevents systemic nature in the economy. Systemic risk thus
currency mismatches and also takes lending off accumulates, which can ultimately bring down the
banks’ balance sheets. whole economy as flows reverse.
When things go smoothly, however, there is some
Of course, this is a wish list, and many developing academic evidence that liberalized equity markets can
economies will be lucky if they have only one of the add a full percentage point to economic growth.6 We
three mitigants in place. There are two major underlying emphasize, however, that developed non-equity capital
“off-market” ingredients: strong local investors, who markets would not impede those positive effects but
have the appetite to participate in these markets, there- rather add significant downside protection.
by creating depth; and a good regulator who monitors The sequencing described here may not apply in
participants’ use of the markets for hedging rather than all circumstances, and a more nuanced view might be
excessive speculation. (According to many credible necessary for individual markets, as addressed in the
accounts, the major fault line that preceded the Asian work of de la Torre and Schmukler,7 among others.
crisis was excessive risk appetite in the respective However, until a better alternative is agreed upon, we
economies’ private sector, which then overwhelmed propose this sequence as a “base case” that countries can
otherwise relatively soundly run sovereigns.) then adapt on the basis of their unique circumstances.
In summary, it would seem that maturity/liquidity The strength of the Financial Development Index
mismatches are probably the most disastrous for an outlined in this Report, from this perspective, lies in its
economy under a sudden reversal of flows, followed by ability to help economies assess their resilience to exces-
currency mismatches (which can bring on inflation/ sive capital flow episodes. With the exception of the
deflation and seriously cripple an economy). The burst- qualitative assessment of the regulator, all the other four
ing of asset bubbles is of course also painful, but—as categories previously explained have associated metrics
long as leverage has been kept in check—this will not in the Index. Table 1 maps them out.
affect an economy as endemically as the previous two Putting the framework outlined in Figure 3 crudely
issues. Figure 3 summarizes our thinking in graphical into practice, we follow a two-step approach. We aggre-
form. gate the first three measurable resilience categories into
It is interesting that many emerging economies first a combined defensive score,8 and map this against an
try to create strong local equity markets and neglect economy’s GDP. If the GDP is small (hence the local
credit and currency markets, thereby making themselves economy can easily be overwhelmed by determined
1.2: Financial Development, Capital Flows, and Capital Controls
Table 1: Financial Development Index metrics mapped against resilience categories

Category Corresponding metrics in the FDI

Strong local investor base 4th pillar: Banking financial services


4.03 Financial system deposits to GDP
4.06 Bank deposits to GDP

7th pillar: Financial access


7.01 Financial market sophistication
7.02 Venture capital availability

Well-developed local credit markets 4th pillar: Banking financial services


4.05 Private credit to GDP

5th pillar: Non-banking financial services (particularly relevant in absence of bond markets)
5.13 Securitization to GDP
5.14 Share of total number of securitization deals

6th pillar: Financial markets


6.13 Private domestic bond market capitalization to GDP
6.14 Public domestic bond market capitalization to GDP

7th pillar: Financial access


7.03 Ease of access to credit (assuming local credit)
7.05 Ease of access to loans (assuming local loans)

Deep local currency markets 6th pillar: Financial markets


6.01 Spot foreign exchange turnover
6.02 Outright forward foreign exchange turnover
6.03 Foreign exchange swap turnover 35
6.07 Foreign exchange derivatives turnover: Currency swaps
6.08 Foreign exchange derivatives turnover: Options

Other asset markets 5th pillar: Non-banking financial services


5.01 IPO market share
5.02 IPO proceeds amount

6th pillar: Financial markets


6.09 Stock market turnover ratio
6.10 Stock market capitalization to GDP
6.11 Stock market value traded to GDP
6.12 Number of listed companies per 10,000 people

7th pillar: Financial access


7.04 Financing through local equity market
1.2: Financial Development, Capital Flows, and Capital Controls

Table 2: Details of the defensive strength indicator speculators) and the defensive score also small, an econ-
omy is at risk from speculative flows. Figure 4 depicts
Defensive Local Local
GDP strength Investor credit currency
the result of this circumstance, with selected economies
2010 FDI data (US$ billion) score base markets markets highlighted.
Bahrain** 20 2.10 4.75 2.50 1.12 The shaded rectangle in the figure depicts the area
Jordan 23 3.19 4.49 3.28 n/a
where we would have cause for concern—countries
Panama** 25 2.83 4.32 2.48 n/a
Slovak Republic* 88 1.30 2.57 1.72 1.02 that are small in GDP, but have relatively weak defenses
Morocco** 91 2.03 3.80 2.68 1.30 against rapid inflows and outflows of capital by way of
Vietnam* 92 1.99 3.05 2.59 1.57 their local markets. Table 2 provides the numerical back-
Bangladesh* 95 1.60 1.98 1.51 n/a
Kazakhstan* 109 1.83 1.56 2.95 1.77
up for this graph, with countries in the shaded rectangle
Kuwait** 111 2.32 3.11 2.32 n/a highlighted according to their relative scores. We have,
Ukraine* 116 1.51 1.94 2.97 1.12 somewhat arbitrarily, drawn a line at US$500 billion
Peru* 127 1.28 1.91 1.89 1.17
Hungary* 129 1.43 2.33 2.34 1.08
GDP, beyond which we consider it less likely for an
Philippines* 161 1.64 2.43 2.39 1.35 economy to be overwhelmed by volatile capital flows.
Romania* 162 1.00 1.60 1.52 1.00 Of course, this somewhat crude measure does not
Chile* 162 1.80 3.24 2.13 1.38
mean that a country is either necessarily about to come
Pakistan** 167 2.03 1.92 1.69 2.41
Nigeria* 173 1.13 1.23 1.00 n/a under speculative pressure or that there are no mitigat-
Singapore 177 4.31 5.69 3.76 3.72 ing factors in its local economy should this happen. A
Egypt** 188 2.43 3.28 2.43 n/a country such as Saudi Arabia is a good case in point—
Malaysia** 191 2.78 5.19 3.98 1.45
Israel* 195 1.95 4.58 1.88 1.18
despite relatively weak defenses as measured by our score,
Czech Republic* 195 1.59 2.94 2.30 1.10 the cash generated by its oil wealth would be likely to
Hong Kong SAR 211 4.27 7.00 2.90 3.47 protect it from the effects of hot money.
Ireland** 228 2.63 4.10 3.90 1.66
Colombia* 229 1.17 1.58 1.86 1.14
Nevertheless, the defensive strength indicator score
United Arab Emirates 230 3.09 4.57 2.93 n/a should spark a constructive debate about some economies’
Finland** 238 2.18 3.64 2.81 1.56 vulnerabilities. It is particularly those economies with a
Thailand** 264 2.28 3.92 2.58 1.68
relatively low strength of local investors (either by way
South Africa* 287 1.95 3.75 2.83 1.15
36 Denmark 309 3.32 3.73 4.54 2.63 of overall population wealth or by way of extreme
Argentina* 310 1.08 1.00 2.14 1.12 wealth concentration) that seem most at the mercy of
Venezuela* 337 1.35 1.33 1.48 n/a foreign capital flows. Currency unions (e.g., the euro in
Saudi Arabia* 370 1.78 3.05 2.21 1.39
Austria** 382 2.51 4.28 2.95 1.77
Slovakia) and other arrangements that are not captured
Norway** 383 2.42 5.65 2.40 1.31 by the FDI variables somewhat mitigate the predictive
Sweden** 405 2.45 3.72 3.57 1.66 score around local currency markets. Again, we are fully
Poland* 430 1.33 2.22 1.71 1.20
Belgium 470 3.23 4.75 4.20 2.23
aware of the shortcomings of the crude methodology
Switzerland 495 4.21 6.52 3.17 3.46 depicted here, and it is not our intention to “name and
Indonesia* 539 1.47 2.47 2.09 1.17 shame” certain economies; rather, we want to stimulate
Turkey* 615 1.75 2.24 2.24 1.65
debate around preparedness for speculative capital flow
Netherlands 795 3.76 5.78 5.49 2.17
Korea, Rep. ** 833 2.32 2.58 3.08 2.09 episodes before they become a matter of urgency.
Mexico* 875 1.24 1.55 2.01 1.20
Australia 997 3.78 5.04 3.88 3.09 Defensive measures and advanced asset markets
Russian Federation* 1,229 1.70 1.51 2.71 1.68
India** 1,236 2.60 3.41 2.76 2.32
As a second step, we look at the relationship between
Canada 1,336 3.93 5.68 4.90 2.70 economies’ defensive measure (the score just discussed)
Spain 1,464 3.26 5.71 4.85 1.66 and their development of more advanced asset markets
Brazil** 1,574 2.06 3.38 3.23 1.31
Italy** 2,118 2.60 2.90 4.23 1.96
(in particular, equities). We compute an advanced markets
United Kingdom 2,184 7.00 6.51 5.29 7.00 score from the variables listed in the last category of
France 2,676 3.77 3.91 4.59 3.25 Table 1, and the results are graphically depicted in
Germany 3,353 3.61 4.81 3.74 2.98
Figure 5.
China** 4,909 2.20 3.62 2.34 1.78
Japan 5,068 4.52 5.99 4.05 3.82 At first glance, the graph shown in Figure 5 con-
United States 14,256 5.36 4.35 7.00 4.65 firms the hypothesis that many emerging economies
Source: The Financial Development Index; authors’ analysis. grow their advanced markets, such as stock exchanges,
Notes: * = countries with a defensive strength score lower than 2.00; before fortifying the more fundamental asset classes of
** = countries with a defensive strength score between 2.00 and 3.00.
Data in blue bold highlight indicator scores lower than 2.00. Because of the credit and foreign exchange. Again, to stimulate debate,
re-normalization of each indicator onto a scale of 1–7, the overall defense
score will not appear as a straight arithmetic mean of its three constituent
we have highlighted those economies where there is a
scores in this table. significantly higher score for advanced market mecha-
nisms than for defensive market ones.9 It may be no
surprise that a considerable number of those economies
have in fact seen their equity markets appreciate signifi-
cantly, and some observers believe that asset bubbles are
1.2: Financial Development, Capital Flows, and Capital Controls
Figure 4: Defensive strength vs size of economy

7
United Kingdom

United States
Defensive strength score

5
Japan
Singapore Switzerland

Hong Kong SAR Canada


4 France
Australia

Germany
Jordan
3
Malaysia
Ireland
Kuwait
Italy China
Bahrain Brazil
Saudi Arabia
2
Turkey

Mexico Russian Federation


Slovak Republic Poland

1
10 100 1,000 10,000 100,000

GDP (US$ billions, logarithmic scale)

Source: Financial Development Index 2010; authors' analysis.


37

Figure 5: Advanced markets vs defensive strength

Hong Kong SAR


7
China Singapore
United States
6
Australia
Advanced markets score

Switzerland
Brazil
Korea Canada
5
Israel
Finland
Sweden
4 South Africa
Bahrain Norway Germany
Russian Fed.
France
Saudi Arabia
3 Belgium
Colombia Denmark

2
Pakistan
Panama

1 Argentina

1 2 3 4 5 6 7

Defensive strength score

Source: Financial Development Index 2010; authors' analysis.


1.2: Financial Development, Capital Flows, and Capital Controls

Table 3: Details of the advanced markets indicator being inflated in some. To reiterate our previous point,
this is not to say that a damaging capital flow episode will
Defensive Advanced
GDP strength markets follow automatically—but it should increase vigilance
2010 FDI data (US$ billions) score score
in at least some of those economies. The transmission
Bahrain 20 2.10 3.50
mechanism of speculative capital via credit, and often
Jordan 23 3.19 4.11
Panama 25 2.83 1.49 the local banking system as well, deserves special atten-
Slovak Republic 88 1.30 1.57 tion in this regard. In particular, smaller countries such
Morocco 91 2.03 3.03 as Colombia, Israel, or Pakistan with low local credit
Vietnam 92 1.99 2.82
Bangladesh 95 1.60 2.03
market scores and absolute size could be more easily
Kazakhstan 109 1.83 2.68 overwhelmed than, say, Russia or China.
Kuwait 111 2.32 3.76 Table 3 gives further numerical detail on the
Ukraine 116 1.51 1.93
Peru 127 1.28 1.73
graphical scores for all the countries in the FDI. Those
Hungary 129 1.43 1.61 countries that have an advanced market score that is sig-
Philippines 161 1.64 2.27 nificantly (by more than 50 percent) higher than their
Romania 162 1.00 2.25
defensive score are highlighted.
Chile 162 1.80 2.22
Pakistan 167 2.03 2.48
Nigeria 173 1.13 2.07 The potential of trade areas and alliances
Singapore 177 4.31 6.85 Without prejudicing the rich debate around how best to
Egypt 188 2.43 2.37
Malaysia 191 2.78 4.94
develop local financial markets—and fully acknowledging
Israel 195 1.95 4.98 that this will not always be an easy endeavor—we offer
Czech Republic 195 1.59 2.43 some thoughts and analysis on what countries can do to
Hong Kong SAR 211 4.27 7.00
Ireland 228 2.63 2.85
strengthen their financial markets.
Colombia 229 1.17 1.95 Regional trade areas, if enacted credibly, can not
United Arab Emirates 230 3.09 4.61 only boost the local economy but also sensibly pool
Finland 238 2.18 4.80
investor resources and to some extent credit markets. To
Thailand 264 2.28 2.15
South Africa 287 1.95 4.04 illustrate this point, we have taken the original ASEAN 5
38 Denmark 309 3.32 2.70 economies from the list and aggregated their scores in
Argentina 310 1.08 1.00 Table 4.
Venezuela 337 1.35 1.03
Saudi Arabia 370 1.78 3.21
It is noteworthy that, even excluding the outlier top
Austria 382 2.51 2.71 score, pooling provides a significant uplift over the
Norway 383 2.42 4.01 weakest scores on each dimension. Currency market
Sweden 405 2.45 4.42
Poland 430 1.33 2.45
scores are the exception, as might be expected in the
Belgium 470 3.23 2.94 presence of a trade union without a currency union
Switzerland 495 4.21 5.54 (though the variables might understate the effect of
Indonesia 539 1.47 2.78
swap lines agreed to under the Chiang Mai initiative).
Turkey 615 1.75 2.74
Netherlands 795 3.76 5.34 An excellent body of research in the field of capital
Korea, Rep. 833 2.32 4.89 flows and their beneficial as well as detrimental effects is
Mexico 875 1.24 1.47 available, and we point to the references for an overview.
Australia 997 3.78 5.88
Russian Federation 1,229 1.70 3.42
We have omitted many of the good arguments that are
India 1,236 2.60 4.71 ongoing in the academic and public-sector debate, as we
Canada 1,336 3.93 5.13 could not do them justice in the space afforded here. Of
Spain 1,464 3.26 6.14
Brazil 1,574 2.06 5.42
the many recent papers, we would like to highlight the
Italy 2,118 2.60 3.51 work by the BIS (CGFS Paper No. 33) and the chapter
United Kingdom 2,184 7.00 5.63 on liquidity expansion of the recent International
France 2,676 3.77 3.62
Monetary Fund (IMF) Global Financial Stability Report as
Germany 3,353 3.61 3.57
China 4,909 2.20 6.66 highly complementary to our discussion here.
Japan 5,068 4.52 3.90
United States 14,256 5.36 6.49

Source: Financial Development Index 2010; authors' analysis. A code of conduct for capital controls
Note: Data in blue bold indicate advanced market scores that are 50 percent
greater than defensive strength scores.
There will never be an economic system without irra-
tional episodes, and therefore all the rational defenses
outlined in the previous section might still not prevent
a capital flow episode that proves a threat to systemic
stability of the local economy. Orthodox economic
theory suggests this should never happen—but recently,
1.2: Financial Development, Capital Flows, and Capital Controls
Table 4: Pooled indicators for the ASEAN 5 economies
Total Local Local Advanced
GDP defensive Investor credit currency markets
2010 FDI data (US$ billion) strength score base markets markets score

Philippines* 161 1.64 2.43 2.39 1.35 2.27


Singapore 177 4.31 5.69 3.76 3.72 6.85
Malaysia** 191 2.78 5.19 3.98 1.45 4.94
Thailand** 264 2.28 3.92 2.58 1.68 2.15
Indonesia* 539 1.47 2.47 2.09 1.17 2.78
ASEAN 5 1,333 2.22 3.57 2.72 1.67 3.45
ASEAN 5 excluding top score 793 2.04 3.50 2.70 1.41 3.04

Source: Financial Development Index 2010; authors' analysis.


Notes: * = countries with a defensive strength score lower than 2.00; ** = countries with a defensive strength score between 2.00 and 3.00. Data in blue bold high-
light scores lower than 2.00.

even the staunchest proponents of that theory have in local financial markets. Therefore we have excluded
acknowledged that extraordinary measures of market them from the scope of this discussion.
intervention might become necessary.10 Furthermore, the research does not look at instances
where capital controls were applied toward flows caused
If it all goes wrong: Capital controls as a last resort by a political and banking crisis. There exists a compre-
We agree that there can be circumstances where market hensive amount of literature on such episodes and we
39
intervention is required, and would rather have the ben- feel we would not be able to add further insight to
efits of global capital flows with the occasional episode these findings.12
of market intervention than a regime that consistently To arrive at the conclusions presented in this
prohibited global flows. But we also would like to chapter, we have created a database of experiences with
emphasize, as stated in the heading, that we do believe capital controls. This database is comprised of nine
in such measures of capital control only as a last resort episodes targeted at hot money in emerging economies
when all else fails.11 In general, it is our belief that per- from 1990 to 2008. In creating this database, we have
sistent market interventions create inefficiencies that used public source data listed in the reference section
lead to a worse outcome further down the road. and also are grateful to IHS Global Insight for sharing
That said, too often capital controls are instigated some of their proprietary data. We have chosen this
as a knee-jerk reaction in a short time frame when timeframe as we feel it holds most relevance for today’s
capital flows become visible and policymakers feel they financial and economic system—analysis of episodes
need to react quickly. There is consequent variation in from the Bretton Woods era would offer limited insights
the instruments being used, often incorrect expectations in our opinion. To arrive at our conclusions, we have
of what they can achieve, and subsequent changes that analyzed nine episodes with a total of 156 individual
contribute to market confusion. We aim to reduce this observations (by which we mean the introduction, with-
variation by offering some principles and recommenda- drawal, or significant change of a capital control measure).
tions for the successful use of capital controls in the The analysis confirms that capital controls are not
remainder of this chapter. an easy response to economic imbalances. If adminis-
The scope of this discussion covers capital controls tered wrongly, they suffer from a variety of problems—
designed to deal with hot money. It does not cover hence the distaste orthodox theory extends toward
regulatory regimes that seek to restrict foreigners’ them. Some considerations are:
participation in local markets over the long term (as
in countries such as India or China). These regimes are • Capital controls by definition are distortive, and
normally governed by national policy interests rather impede free markets.
than the need to contain short-term destabilizing
money flows, and are therefore not subject to the same • Their long-term efficacy is by no means proven,
pressures of quick decision making and potential panic and in fact is disputed by a number of reputable
studies.13
1.2: Financial Development, Capital Flows, and Capital Controls

• If they are not implemented correctly, sophisticated Stability Report by finding market-based controls to be
players can circumvent capital controls easily, and more transparent and predictable than others, leading to
the subsequent environment of frequent adjust- more positive sentiment, even though the direct imme-
ments introduces uncertainty about an economy as diate efficiency of the controls might be no better or
a destination of funds. In the extreme, this can lead worse than that of administrative controls.15 Third, and
to long-lasting reputational damage and reduced in accordance with the IMF’s findings, administrative
foreign investment into an economy. controls tend to carry a higher operational cost and exe-
cution risk. This is particularly true for those economies
These points are, rightly, affirmed in the IMF’s that are not heavily regulated in the first place and that
recent Global Financial Stability Report as well as its pre- therefore lack the right talent pools and administrative
vious publications and stance. We also concur with the structures to enforce controls in the face of highly
IMF that capital controls do not succeed in addressing sophisticated speculators.
an underlying economic issue (such as an unsustainable While capital controls can prevent instability in the
currency peg or a mismatch between monetary and fis- short term, the development of other aspects of local
cal policy). markets will be more effective in the long run. A good
Depending on the cause of flows, there might be legal and regulatory framework, as well as adequate local
some adequate alternatives to capital controls. For exam- capital markets—particularly bond markets to sterilize
ple, it might be possible for regulators and the Financial interventions16—can be an important part of an
Stability Board to work with major prime brokers (who improvement plan. Timing an improvement plan’s
provide credit to hedge funds) on temporary dynamic announcement with the introduction of capital controls
limits for credit extension into “crowded trades.” Such will signal the long-term intent and seriousness of the
an effort, in the spirit of constructing a “circuit breaker,” economy’s policymakers. Prudential regulation in partic-
while of course still interfering with markets, might be ular has been seen as a useful tool in mitigating asset
preferable to a full-blown capital control regime in price inflation and promoting output stability17—this
terms of administrative effort and reputational issues. should be considered before, or in parallel with, reaching
into the capital control toolbox.
40 A suggested decision-making framework for capital Because the effectiveness of capital controls will
controls diminish over the long run, it is important to keep the
Potentially the most pertinent lesson to be learned from exit strategy in mind from the beginning—and, where
past episodes is that successful implementations of capi- possible, to signal this strategy clearly to the markets.
tal controls must be considered in the broader context. This approach ensures that the economy imposing
So, rather than trying to narrowly penalize a particularly the capital controls is seen as transparent and having a
egregious type of capital flow or investor, it is very predictable long-term strategy, which greatly helps in
important to start with the goals and available policies attracting “good flows” in the future. Figure 6 summa-
that the capital controls are trying to enhance. This rizes our thinking in a graphical fashion.
allows communication of a positive strategy to the mar- It should also be pointed out that the iteration
kets and prevents the perception of a retributive regime process outlined above is not purely for academic or
that, in the long run, might destabilize the economy planning purposes. Once an economy has successfully
more than short-term capital flows ever would have. introduced (and exited) capital controls, there remains a
When it comes to preventing instabilities, we are risk that the circumstances that led to their introduction
convinced that those controls that employ market forces will recur. Examples in our database are:
constructively by channeling and signaling are ultimately
more successful than those that purely try to inhibit • Brazil (1993–97, 2000, 2009)
markets. First, the financial firepower of markets (as • Colombia (1993–98, 2007)
outlined in the overview to this chapter) can easily • Malaysia (1994, 1997)
overwhelm local economies. Second, sophisticated • Thailand (1995, 1997, 2006)
market participants can employ a variety of instruments
to circumvent controls that make no economic sense to This recurrence might reflect an appetite by policy-
them—and will always do so given enough time.14 So, makers to revert back to what used to work well as
although capital controls can act as successful speed much as an appetite by arbitrageurs to test the waters on
bumps in the short run, it is wise to think about giving an economy they have targeted before. Either way, it is
positive incentives to encourage investors where their useful for policymakers to consider that they are likely
money is desired while making it more difficult for to re-introduce capital controls at some point in the
them to place money where it is not desired. The IMF future—and to avoid any rhetoric to the contrary that
acknowledges this position in its latest Global Financial might undermine their credibility.
1.2: Financial Development, Capital Flows, and Capital Controls
Figure 6: Best practice process and a checklist for introducing capital controls

Process
Instability Tool Exit
Goals Policies prevention selection Efficacy strategy

• Identify economic • Identify realistic • Prevent instability • Carefully select • Ensure measures • Develop a soft
goals policies to through a strong the right reactions are effective landing
— E.g., quantified achieve goals prudential frame- and tools — Draw on data- — Study exits
annual growth given constraints work — Leverage data- base of capital from capital con-
targets of trilemma and — Sufficient body base of capital controls’ success trols captured in
pre-existing con- of laws controls to under- measures and the database to
ditions — Appropriate stand the best control detail to plan appropriately
— E.g., exchange regulatory bodies tools for a given understand keys for a smooth exit
rate stability and that support long- set of conditions to effectiveness of
Activities

perfect capital term financial a given set of


mobility sustainability controls
— Independent through:
monetary policy —• Monitoring
and perfect capi- —• Disclosure
tal mobility —• Reporting
— Promote a
financial system
where markets’
interest is in line
with economic
stability and
growth

Final y
ly, mo ateg
nitor effe ne str
cts and reiterate to fine-tu
41

Source: Authors’ analysis.

Capital controls can be an effective stop-gap to economy. Particular attention should be paid to desirable
implement measures that allow for managing the flows such as FDI or those from trade patterns, and,
economy toward a softer landing than would otherwise where possible, controls should be chosen that minimize
be possible in the presence of destabilizing volatility. disruption in these areas under realistic scenarios.
However, behavioral finance implications should not be The importance of moral suasion and clear com-
overlooked. If used over the longer term, capital controls munication on any measure is paramount, and devising
not only have diminished effectiveness but also can a communication strategy that sets out the above points
undermine investor confidence and result in a higher clearly should be a key step when considering capital
cost of capital for the economy for years to come. Thus, controls. The power of the right narrative ensures that
as a general principle, the shorter a capital control those speculators who are targeted by the control
regime is kept in place, the better. understand the determination of the local economy, but
We also echo the IMF’s position that, when con- also that providers of desirable inflows feel they are still
sidering capital controls, policymakers should take into welcome. There is no cost associated with getting this
account not just their own economy but also the inter- right; on the other hand, there is often considerable cost
play with other linked (geographically or through trade) when enforcing new legislation related to capital controls.
economies.18 What makes sense in isolation might have Of course, the right choice of capital controls is also
unintended consequences for related economies, which very important. The next section will discuss findings on
in turn can lead to undesirable outcomes for the initiating both tool selection and related efficacy in greater detail.
1.2: Financial Development, Capital Flows, and Capital Controls

Which capital controls for which situation to exacerbate flows and either drain foreign reserves (in
Analysis of the historical episodes showed that five types the case of depreciation pressures) or force the central
of capital controls were employed most frequently. None bank to issue debt at higher rates than the foreign bonds
of them was a panacea, and Table 5 lists their major it purchases (in the case of appreciation pressures).
observed strengths and weaknesses. Cautionary examples of such episodes include:
The efficacy of a capital control will crucially
depend on the motivation of the speculators it is sup- • the fall of Mexican foreign reserves by 77 percent
posed to deter. Particularly important is an insight into (a loss of US$20 billion) in the 12 months leading
what drives the observed capital flows. In our database, to the 1994 peso devaluation, and
we found two fundamentally different root causes for
systemically dangerous amounts of hot money (Table 6). • the fall of Malaysian foreign reserves by 37 percent
Other root causes, such as appreciation of a specific asset (a loss of US$ 10 billion) in the 8 months of the
class (e.g., city real estate) are rarely of a magnitude that 1997 crisis.
threatens the whole economy and can be dealt with
within classic regulatory tools such as lending standards. This observation is backed by academic research,
It should be clear that certain tools lend themselves which concludes that sterilized intervention increases
more easily to countenance arbitrageurs drawn by a the volume of capital flows and tilts the balance toward
specific root cause. For example, an unremunerated short-term instruments (FDI and long-term portfolio
reserve requirement (URR) has proven effective when flows are usually not strongly affected by sterilization
deployed in an interest rate differential situation, whereas efforts).20
quantitative limits are more appropriate against currency Academic studies have found that fiscal discipline
depreciation expectations. and steady public expenditure during episodes of large
The episodes show that it pays not to attempt highly capital inflows can help limit real currency appreciation
detailed and targeted capital controls—a broad measure and foster better growth outcomes in the aftermath.
such as a URR is often more successful than highly Sterilized intervention has been observed to be less
targeted measures that investors find easy to circumvent. effective, and tightening capital controls does not sig-
42 Features that make the URR successful in an interest nificantly improve the outcome either.21
rate differential situation include: In a similar vein, measures to limit specific investment
strategies for foreigners are usually quickly circumvented
• the adjustability of the measure (“analogue” and not very effective, particularly when the economic
measures generally also allow for easier exit than upside (e.g., a combination of a tightly managed exchange
“digital” ones); rate and high interest rates) persists. Removing the incen-
tive for speculation needs to be a priority, as capital con-
• the direct reduction of arbitrage payoff to sources trols alone will not do this. Proving the point, a study of
of hot money, implying a degree of rationality that controls on international transactions in the domestic
reduces uncertainty to providers of desired capital currency and stock market operations found no statisti-
flows; and cally significant impact on the interest rate differential.22
Capital controls that impose additional costs on
• the difficulty in circumventing, assuming there international asset transactions have been shown to
are no exemptions for certain entities (which reduce volatility of exchange rates in the long run,
arbitrageurs usually exploit very quickly). but increased volatility should be expected in the short
run.23 There are also effects on the real economy in the
As a counterexample to this, outright prohibitions form of lower equilibrium output levels, and exports
often result in an escalating reactive arms race of new into developing and transition economies have been
legislation that further exacerbates the situation and found to be reduced by capital controls.24
increases uncertainty about policymakers’ ability to stay Firms with only domestic currency revenues might
in charge. Looking at the Argentinean 2001/2 episode, also find access to foreign currency debt more difficult
some 50 new laws were implemented in a short period. under a capital controls regime, even where such access
Despite (or possibly because of) this, the EMBI spread is not explicitly in scope of the controls.25 An assessment
of Argentina’s sovereign bonds rose in excess of 5,000 of the benefits from capital controls versus the potential
basis points over US Treasuries.19 longer-term consequences is therefore important,
Experience from the database suggests that while particularly if the economy relies on a certain growth
hot money is temporary by its very definition, it will trajectory.
continue to target the economy until the underlying On a final note, depending on the state of the
incentive to speculate is removed. Specifically, exchange economy, certain capital controls might not work as
rate sterilization without addressing the core imbalance effectively as others. For example, debt and equity
should be cautioned against. Such sterilization is likely controls to reduce outflows (while not affecting inflows)
1.2: Financial Development, Capital Flows, and Capital Controls
Table 5: Overview of the most frequently employed capital

Typical Main
Tool manifestation Historic usage Key strength weaknesses
<50% URR on new Columbia 2007 Direct reduction of Requires unilateral
Unremunerated
foreign borrowing Thailand 2006 arbitrage payoff and and tightly enforced
reserve Argentina 2001 puts investor assets at application to be
requirements Malaysia 1994 risk effective
(URR) Brazil 1994
Chile 1991

Minimum stay require- Columbia 2007 Buys time for policy- Only delays capital
Time ments on investments Thailand 2006 makers to close flow and does not
requirement or extending maturity of Argentina 2001 arbitrage opportunity eliminate it
debt Malaysia 1994
Brazil 1994
Chile 1991

Limits on pension fund Columbia 2007 Targets immense Encourages


Quantitative investment allocations Thailand 2006 size of speculative maximization of
limit or limit on non–trade- Argentina 2001 transactions that allowance
related foreign Malaysia 1994 exacerbate
exchange holdings Chile 1991 destabilization

Investment tax on short- Brazil 1994 Directly and narrowly Significantly reduces
Direct tax on term debt for foreign Chile 1991 targets speculative investor confidence
financial investors Argentina 2001 transactions
transactions

Limit sale of domestic Thailand 1997 Causes minimal Encourages


Regulation of currency by domestic Malaysia 1997 distortion in domestic circumvention by
trade between investors to overseas markets diverting capital flow 43
residents and investors into non-prohibited
non-residents investment vehicle

Source: Authors’ analysis.

Table 6: Root causes of systemically dangerous amounts of hot money


Root cause Country Timeframe

INTEREST RATE DIFFERENTIAL


Chile June 1991 – Sep 1998
Combination of tightly managed (pegged) exchange rates and high interest Brazil June 1993 – Jan 1995
rates targeting inflation creates an opportunity for arbitrage. Typically large Malaysia Jan 1994 – Aug 1994
volumes of foreign investment into short-term debt instruments.
Mexico Dec 1994 – Apr 1995
Argentina Mar 2001 – Dec 2002

CURRENCY DEPRECIATION EXPECTATION


Thailand Dec 2006 – Mar 2007
Perception of deteriorating economic fundamentals stirs devaluation Colombia Jan 2007 – July 2008
expectations that create a self-reinforcing loop
Thailand Mar 1997 – Jan 1998
Malaysia Aug 1997 – Feb 1999

Source: Authors’ analysis.


1.2: Financial Development, Capital Flows, and Capital Controls

Figure 7: Best practice process and a checklist for introducing capital controls

Knowledge Dialogue Policymakers

Database Metrics

• List of key contacts to aid • Code of practice, • Dialogue with nations • Clients are typically policy-
countries considering capital recommendations for experiencing hot money makers in emerging market
controls appropriate and effective flows economies
use of capital controls
• Discussion informed by • Hot/foreign money is
• Advice informed and metrics (e.g., Financial creating instability in
supported by the database, Development Index) domestic economy
a catalog of capital controls
and their historical uses • Advice provided by key • Use of capital controls
contacts and informed by is under consideration
code of practice and
database

44 Source: Authors’ analysis.

have been shown to work effectively only in high- Further work to be done would include boosting
income countries.26 the database of episodes with both more historical
(reaching back to the 1970s) and more recent (e.g.,
Brazil 2009) experiences. It could also prove useful to
Concluding remarks look at countries with long-standing capital controls
We see this work as the starting point of the creation (e.g., India, China) and examine the dynamic changes
of a knowledge base that is both factual/generic and in they have made over time to their regimes. Resourced
a form that will enable experts to provide tailored appropriately, this need not be an overly onerous under-
advice to policymakers. Such a knowledge base should taking; it could even be undertaken by a modestly bud-
be administered and maintained by an appropriate geted research team and should refine and sharpen some
international and impartial institution—we would of our conclusions significantly.
suggest the IMF for this purpose, and are particularly We hope that this chapter will be helpful for policy-
encouraged by its recently revised stance toward capital makers in emerging economies who feel in danger of
controls, which makes such a function more tenable. being overwhelmed by large capital flows. It is intended
The Financial Stability Board, with its responsibility to be only the beginning of a larger effort to provide a
for monitoring financial system vulnerability, would solid framework for a policy mechanism that will stay
be likely to find the output useful. Figure 7 depicts our pertinent as globalization continues and the global eco-
conception of such a model. nomic and financial system grows ever more connected.
We would also advocate establishing a regular dia- We would rather have the option of imposing occasional
logue based on metrics that might signal vulnerability to capital controls in certain circumstances than have to
suddenly rising capital flows. This could take the form reverse out of global markets with their numerous bene-
of “what if ” scenario planning and would ensure that fits, particularly for emerging economies.
policymakers can impose capital controls in a measured
and prepared fashion when the need arises. The metrics
outlined earlier in this chapter might provide a good
starting point.
1.2: Financial Development, Capital Flows, and Capital Controls
Notes ———. 2007b. Bank of Thailand News 13 (2007): March 1. Bangkok:
Bank of Thailand.
1 See http://www.economist.com/research/Economics/
alphabetic.cfm?letter=A#animalspirits for a definition of animal ———. 2007c. Bank of Thailand News 33 (2007): July 24. Bangkok:
spirits. Bank of Thailand.

2 See Bernanke 2010. ———. 2007d. Bank of Thailand News 62 (2007): December 17.
Bangkok: Bank of Thailand.
3 See, e.g., Eichengreen 2001 and BIS 2009, among many.
Batini, N. and E. Nelson. 2000. “When the Bubble Bursts: Monetary
4 See Appendix A for a list of Council members.
Policy Rules and Foreign Exchange Market Behaviour.” Mimeo.
5 By hot money we mean speculative short-term capital flows that October 2000, Bank of England.
seek high risk-adjusted returns. They are characterized by multiple
Bekaert, G., C. R. Harvey, and C. Lundblad. 2005. “Does Financial
short-term investments in large quantities and can be very
Liberalization Spur Growth?” Journal of Financial Economics 77
volatile.
(2005): 3–55.
6 Bekaert et al. 2005.
Berg, A. 2009. “Fiscal Policy in Sub-Saharan Africa in Response to the
7 De la Torre and Schmukler 2007. Impact of the Global Crisis.” IMF Staff Position Note SPN/09/10.
Washington, DC: IMF.
8 This is done by simply averaging the scores across the variables
mentioned in Figure 4; more sophisticated approaches can of Bernanke, B. S. 2010. “Causes of the Recent Financial and Economic
course be envisaged. As in the overall FDI methodology, a score Crisis.” Testimony before the Financial Crisis Inquiry Commission,
of 1 is the lowest, a score of 7 the highest. September 2. Washington, DC: Board of Governors of the Federal
Reserve System. Available at http://www.federalreserve.gov/
9 For our purposes here, significantly higher is higher by 50 newsevents/testimony/bernanke20100902a.htm.
percent, a somewhat arbitrarily chosen figure.
Bernanke, B. S. and M. Gertler. 1999. “Monetary Policy and Asset
10 See Ostry et al. 2010. Volatility.” Federal Reserve Bank of Kansas City Economic Review
84 (4): 17–52.
11 By capital controls we mean restrictions placed on investors’
freedom to move capital across borders. These controls are imple- Bincini, M., M. Hutchison, and M. Schindler. 2009. “Controlling Capital?
mented by local authorities to benefit the domestic Legal Restrictions and the Asset Composition of International
economy by reducing destabilizing pressures caused by Financial Flows,” IMF Working Paper No. 09/208. Washington, DC:
(perceived) speculative investors. IMF.

12 See, for example, Reinhart and Rogoff 2009. BIS (Bank for International Settlements), Committee on the Global
Financial System. 2009. “Capital Flows and Emerging Market
13 See, for example, Berg 2009; Clements and Kamil 2009;
Economies.” CGFS Publications No. 33, January. Basel: Bank for
and Edwards 1999.
International Settlements.
14 For example, see Cardoso and Goldfajn 1997; IMF 2010a.
Calvo, G. A. and E. G. Mendoza. 1996. “Mexico’s Balance of Payments 45
15 IMF 2010a. Crisis: A Chronicle of a Death Foretold.” Journal of International
Economics 41 (3): 235–64.
16 See, for example, Balino et al. 1991 and Annex IV to the IMF’s
1998 International Capital Markets report. Cardarelli, R., S. Elekdag, and M. Ayhan Kose. 2009. “Capital Inflows:
Macroeconomic Implications and Policy Responses.” IMF Working
17 N’Diaye 2009. Paper No. 09/40. Washington, DC: IMF.

18 IMF 2010a. Cardoso, E. and I. Goldfajn. 1997. “Capital Flows to Brazil: The
Endogeneity of Capital Controls.” IMF Working Paper No. 97/115.
19 JP Morgan Chase, Emerging Bond Index Plus.
Washington, DC: IMF.
20 Montiel and Reinhart 1999.
Cecchetti, S. G., H. Genberg, J. Lipsky, and S. Wadhwani. 2000. “Asset
21 Cardarelli et al. 2009. Prices and Central Bank Policy.” Geneva Reports on the World
Economy 2. Geneva: International Centre for Monetary and
22 Tamirisa 2004. Banking Studies and Centre for Economic Policy Research.

23 Frenkel et al. 2001. Cecchetti, S. G., H. Genberg, and S. Wadhwani. 2002. “Asset Prices in a
Flexible Inflation Targeting Framework.” In Asset Price Bubbles:
24 Tamirisa 1998.
The Implications for Monetary, Regulatory and International
25 Prati et al 2009. policies, ed. by W. C. Hunter, G. G. Kaufman, and M. Pomerleano.
Boston: MIT Press. 427–44.
26 Bincini et al 2009.
Clements, B. and H. Kamil. 2009. “Are Capital Controls Effective in the
21st Century? The Recent Experience of Colombia.” IMF Working
Paper No. 09/30. Washington, DC: IMF.

References De la Torre, A. and S. L. Schmukler. 2007. Emerging Capital Markets and


Ariyoshi, A., K. Habermeier, B. Laurens, I. Otker-Robe, J. I. Globalization: The Latin American Experience. Washington, DC and
Canales-Kriljenko, and A. Kirilenk. 2000. “Capital Controls: Palo Alto, CA: The World Bank and Stanford University Press.
Country Experience with Their Use and Liberalisation.” IMF Dominguez, K. M. E. and L. L. Tesar. 2004. “International Borrowing and
Occasional Paper No. 190. Washington, DC: IMF. Macroeconomic Performance in Argentina.” RSIE Discussion
Balino, T. J. T., A. Bennett, and E. Borensztein. 1991, “Monetary Policy in Paper No. 532 Michigan: University of Michigan.
Dollarized Economies.” IMF Occasional Paper No. 171. Edison, H. J. and C. M. Reinhart. 2000. “Capital Controls During
Washington, DC: IMF. Financial Crises: The Case of Malaysia and Thailand.” Finance
Bank of Thailand. 2006a. Bank of Thailand News 48 (2006): December 4. Discussion Papers No. 662. Washington, DC: Board of Governors
Bangkok: Bank of Thailand. of the Federal Reserve System International.

———. 2006b. Bank of Thailand News 51 (2006): December 18 Edwards, S. 1999. “How Effective Are Capital Controls?” NBER
Bangkok: Bank of Thailand. Working Paper 7413. Cambridge, MA: National Bureau of
Economic Research.
———. 2006c. Bank of Thailand News 52 (2006): December 22.
Bangkok: Bank of Thailand. Eichengreen, B. 2001. “Capital Account Liberalization: What Do
Cross-Country Studies Tell Us?” The World Bank Economic
———. 2007a. Bank of Thailand News 01 (2007): January 15. Bangkok: Review 15 (3): 341–65.
Bank of Thailand.
1.2: Financial Development, Capital Flows, and Capital Controls

Eichengreen, B. and D. Leblang. 2003, “Capital Account Liberalization


and Growth: Was Mr Mahatir Right?” International Journal of
Finance & Economics, Special Issue: Symposium on Capital
Controls 3: 205–24.

Frenkel, M., C. Nickel, G. Schmidt, and G. Stadtmann. 2001. “The


Effects of Capital Controls on Exchange Rate Volatility and
Output.” IMF Working Paper No. 01/187. Washington, DC: IMF.

Gil-Diaz, F. 1998. “The Origin of Mexico’s 1994 Financial Crisis.” The


Cato Journal 17 (3).

IIF (International Institute of Finance). 2010. “Capital Flows to Emerging


Market Economies. IIF Research Note, April 15. Washington, DC:
International Institute of Finance.

IMF (International Monetary Fund). 1998. “Annex IV: Chile’s Experience


with Capital Controls.” International Capital Markets, September.
Washington, DC: IMF.

———. 2010a. Global Financial Stability Report: Meeting New


Challenges to Stability and Building a Safer System. Washington,
DC: IMF.

———. 2010b. World Economic Outlook Database. August. Washington,


DC: IMF.

Johnston, R. B., S. M. Darbar, and C. Echeverria. 1997. “Sequencing


Capital Account Liberalization: Lessons from the Experiences in
Chile, Indonesia, Korea and Thailand.” IMF Working Paper No.
97/157. Washington, DC: IMF.

Johnston, R. B. and N. T. Tamirisa. 1998. “Why Do Countries Use Capital


Controls?” IMF Working Paper No. 98/181. Washington, DC: IMF.

Krugman, P. R. and M. Obstfeld. 2009. International Economics: Theory


and Policy, 8th edition. Boston: Pearson.

Laurens, B. and J. Cardoso. 1998. “Managing Capital Flows: Lessons


from the Experience of Chile.” IMF Working Paper No. 98/168.
Washington, DC: IMF.
46 Montiel, P. and C. M. Reinhart. 1999. “Do Capital Controls and
Macroeconomic Policies Influence the Volume and Composition of
Capital Flows? Evidence from the 1990s.” Journal of International
Money and Finance 18 (1999): 619–35.

N’Diaye, P. 2009. “Countercyclical Macro Prudential Policies in a


Supporting Role to Monetary Policy.” IMF Working Paper No.
09/257. Washington, DC: IMF.

Ostry, J. D., A. R. Ghosh, K. Habermeier, M. Chamon, M. S. Qureshi,


and D. B. S. Reinhardt. 2010. “Capital Inflows: The Role of
Controls.” IMF Staff Position Note SPN/10/40. Washington, DC:
IMF.

Prati, A., M. Schindler, and P. Valenzuela. 2009. “Who Benefits from


Capital Account Liberalization? Evidence from Firm-Level Credit
Ratings Data.” IMF Working Paper No. 09/210. Washington, DC:
IMF.

Reinhart, C. M. and V. R. Reinhart. 1998. “Some Lessons for Policy


Makers Who Deal With the Mixed Blessing of Capital Inflows.”
MPRA Paper No. 7123. College Park: University of Maryland.

Reinhart, C. M. and K. S. Rogoff. 2009. This Time Is Different: Eight


Centuries of Financial Folly. Princeton: Princeton University Press.

Reinhart, C. M. and T. S. Smith. 1998. “Too Much of a Good Thing: The


Macroeconomic Effects of Taxing Capital Inflows.” MPRA Paper
No. 13234. College Park: University of Maryland.

Tamirisa, N. T. 1998. “Exchange and Capital Controls as Barriers to


Trade.” IMF Working Paper No. 98/81. Washington, DC: IMF.

———. 2004. “Do Macroeconomic Effects of Capital Controls Vary by


Their Type? Evidence from Malaysia.” IMF Working Paper No.
04/3. Washington, DC: IMF.

Taylor, J. B. 2001. “The Role of the Exchange Rate in Monetary-Policy


Rules.” American Economic Review 91 (2): 263–7.

World Economic Forum. 2009. The Financial Development Report 2009.


New York: World Economic Forum USA Inc.
1.2: Financial Development, Capital Flows, and Capital Controls
Appendix A: Global Agenda Council on Global Investment Flows: List of Members

Howard Davies World Economic Forum Contributors


Director, London School of Economics and Council Manager: Isabella Reuttner
Political Science, United Kingdom Research Analyst: Kieran Gopaul
(Council Chair) Forum Lead: Kevin Steinberg
Laura M. Cha
Deputy Chairman, HSBC, External Research Assistant
Hong Kong SAR Eva Gustavsson, Barclays Capital
(Council Vice-Chair)
Manvinder S. Banga
President, Foods, Home and Personal Care, Unilever,
United Kingdom
Andreas Beroutsos
Partner, Eton Park Capital Management,
United States
Ibrahim S. Dabdoub
Group Chief Executive Officer, National Bank of
Kuwait, Kuwait; Chair, Arab Business Council,
World Economic Forum
Michael Drexler
Managing Director, Global Head of Strategy
Corporate/Investment Banking and Wealth
Management, Barclays plc, United Kingdom
Barry Eichengreen
Professor of Economics and Political Science,
University of California (Berkeley), United States
Asaf Farashuddin
Vice-President, Strategy and Initiatives, 47
IHS, United States
Diana Farrell
Deputy Director, National Economic Council (NEC),
United States
Per-Kristian Foss
Member of Parliament, Norway
Steven J. Gilbert
Chairman, Gilbert Global Equity Partners,
United States
Takatoshi Ito
Professor, Graduate School of Economics and
Public Policy, University of Tokyo, Japan
Gerard Lyons
Chief Economist and Group Head, Global Research,
Standard Chartered, United Kingdom
Robert Pozen
Chairman, MFS Investment Management,
United States
Angela Redish
Professor, Department of Economics,
University of British Columbia, Canada
John J. Studzinski
Senior Managing Director and Global Head,
Corporate Advisory Services, Blackstone Group,
United Kingdom
Levent Veziroglu
Executive Vice-President, Dogus Holding, Turkey
Jacob Wallenberg
Chairman, Investor AB, Sweden
Bernard Yin Yeung, Dean and Stephan Riady
Distinguished Professor, National University of
Singapore, Singapore
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?
CHAPTER 1.3 Small- and medium-sized enterprises (SMEs) account
for a large share of enterprises as well as a large share of
overall employment in the private sector of most
SME Finance: What Have We economies, a situation that justifies the statement that
“SMEs are the emerging private sector in poor countries
Learned and What Do We Need and thus form the base for private sector–led growth.”1
Cross-country evidence, however, also shows that SMEs
to Learn? are more constrained in their operation and growth than
large enterprises and access to financial services features
THORSTEN BECK, CentER and EBC, Tilburg University, and CEPR.
importantly among the constraints.2
Recently, and partly because of the global economic
crisis, SME finance has gained prominence in policy-
makers’ discussions. The G-20 has established a committee
on SME finance, co-chaired by Germany and South
Africa, and has supported the G20 SME Finance
Challenge, a competition for innovative solutions to
overcome SMEs’ financing constraints.3 Many sugges-
tions for financial sector reforms—including regulatory
reform discussions, often referred to as Basel 3—are tested
for their impact on SMEs.
What have we learned from empirical research over
the past 10 years? What are the policy implications from
this research? And where do researchers still need to
provide answers? What data requirements must be
addressed to answer these questions? This paper summa-
rizes research on SME finance over the past 10 years
and the policy recommendations arising from it, as well 49
as points to open questions and the data that we need to
answer these questions.

SMEs’ role in the economy


Policy efforts targeted at SMEs have often been
justified with arguments that (1) SMEs are an engine of
innovation and growth and (2) they help reduce poverty
because they are labor-intensive and thus stimulate job
growth, but (3) they are constrained by institutional and
market failures.4 Cross-country, country-level, and
microeconomic studies, however, do not support these
claims. One study shows that, although faster-growing
economies have a higher share of SME employment in
their manufacturing sectors, it is not the size of this
segment that drives growth.5
On the other hand, cross-country research has
pointed to the institutional and business environments—
including well-defined property rights, both between
private parties and protection against government
expropriation; effective contract enforcement; competi-
tive product, labor, and capital markets; and a legal
framework that allows for relatively easy entry and
exit of enterprises—as important factors for economic
development. Another study shows that high firm regis-
tration costs hamper new firm creation and growth,
while property right protection and regulations fostering
access to finance are conducive to firm creation and
growth.6 The effect of such policies might also explain
the absence of a robust relationship between the size of
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?

Figure 1: Comparison of financing of small, medium, and large enterprises

60 n Small
n Medium
50 n Large
Percentage of firms

40

30

20

10

Finance working capital Use fixed asset finance Use loans Cite finance as severe obstacle

Source: The World Bank’s Enterprise Surveys and author’s calculations. Averages across firms and countries are from Enterprise Surveys undertaken between
2005 and 2009.

50
the SME sector and economic growth, as a comparison Small firms do not only report higher financing
between Italy and the United Kingdom illustrates. On obstacles, they are also more adversely affected by these
the one hand, Italy has high registration costs and many obstacles. Using firm-level data across 56 countries,
old, inefficient, and slow-growing SMEs; the United researchers find that small firms’ financing obstacles have
Kingdom, on the other hand, with low entry barriers, almost twice the effect on their growth that large firms’
has firms that enter at a lower scale than they do in Italy financing obstacles do.9
but grow more rapidly.7 Quasi-natural experimental evidence confirms
The empirical evidence thus points to the entry the importance of credit constraints for firm growth.
of new firms—which are mostly small at entry—and the Analyzing detailed loan information on 253 Indian SMEs
possibilities for successful SMEs to grow as decisive. It before and after they became eligible for a directed sub-
is not the size of the SME segment but their dynamism sidized lending program, a recent study finds that the
that helps economic development. Recognizing additional credit resulted in a proportional increase in
dynamism rather than size of the SME sector as the sales rather than a substitution for other non-subsidized
source of economic development identifies another credit, indicating that these firms were credit constrained
important distinction that analysts should make among before receiving subsidized credit.10 Similarly, another
the firm population: informal microenterprises, the study finds that small non-listed and non-group firms
establishment of which is often the result of a lack of in Pakistan reduce their sales after they become ineligible
alternative economic opportunities, and small formal for subsidized export credit, indicating the existence
enterprises, some of which might have high growth of credit constraints; in contrast, large, listed, and group
potential. firms do not reduce their sales after losing access to
subsidized credit.11 Going even further down the size
scale, yet another study uses a randomized experiment in
Corporate finance: The size gap Sri Lanka to test the productivity of capital by providing
Small firms consistently report higher financing obsta- small grants to a group of micro-entrepreneurs and
cles than medium and large enterprises, as do younger comparing their returns to a control group. These
firms.8 The higher financing obstacles reported by researchers find annualized returns of 55 to 63 percent.12
small as compared with large firms are also reflected in Recent research also shows the importance of the
financing patterns (Figure 1). SMEs use significantly less business environment for firms’ financing constraints
external funding for both working capital and fixed asset and patterns. One paper demonstrates that institutional
investment. development, measured very broadly, is the most robust
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?
Figure 2: Access possibilities frontier for credit services

Constrained Optimum Excess


access access access

iiii (fully inclusive)


Interest rate

i* (equilibrium)
II I III

S’ S*

imc (risk free)

B A C 100%

Share of borrowers served

Source: Beck and de la Torre, 2007.

Notes: The access possibilities frontier (APF) is the maximum share of SMEs that can be served in a commercially viable way. i = interest rate; i * =equilibrium
interest rate; imc = risk-free interest rate; see text for descriptions of points I (A), II (B), and III (C); S* = fully efficient APF with maximum profitable outreach;
S’ = inefficient APF caused by regulatory distortions or lack of contestability.

51
country characteristic predicting cross-country variation development.18 On the other hand, access to financial
in firms’ financing obstacles, even after controlling for services can help new entrepreneurs survive beyond the
cross-country differences in GDP per capita.13 The posi- first year, as evidence from Bosnia shows,19 and can help
tive effect of financial and institutional development can enterprises innovate at a faster rate.20
also be observed in the use of external finance. Better The access possibilities frontier is introduced here as
protection of property rights increases external financing an approach to understanding the size gap in corporate
of small firms significantly more than it does for large finance as well as a platform on which to discuss both
firms, particularly because of the differential impact it bank-level and government-level responses that attempt
has on bank and supplier finance.14 Another study shows to close this gap.21 Transaction costs and information
that the effect of obstacles on firm growth is smaller in asymmetries drive the variation in access to finance
countries with better-developed financial and legal across firms of different sizes. Fixed transaction costs in
systems,15 while yet another shows that financial develop- credit assessment, processing, and monitoring result in
ment exerts a disproportionately large positive effect on a decrease of unit costs as the size of the loan increases,
the growth of industries that are naturally composed of which makes lending to SMEs more costly. In addition
more small firms.16 Financial and institutional develop- to transaction costs, SME lending, more than other
ment helps create a level playing field between small and lending product, is affected by the inability to manage
large firms, while the lack of an effective financial system risks. Compared with large firms, SMEs are commonly
explains the phenomenon of “the missing middle” more opaque, less likely to be able to post collateral,
observed in many developing countries. and often do not have audited financial statements that
The constraining effect of financial and institu- allow a better picture of the enterprise and its projected
tional underdevelopment also shows up in a distorted profits.
size distribution. Research indicates that, in a cross- Both lending techniques and government policies
country sample, large firms—that is, firms that are most affect the extent to which transactions costs and risk
likely to be able to choose the boundaries of the firm— reduce SMEs’ access to external funding. We define as
are larger in countries with better-developed financial the access possibilities frontier the maximum share of
and legal systems;17 another study finds that, for a sample SMEs that can be served by financial institutions in a
of European countries, financial development enhances commercially viable way (see Figure 2, Point I). This
new firm entry in sectors that depend more heavily on concept implies that, in many economies, a large share
external finance and that the smallest size firms benefit of microenterprises and even small formal firms might
the most in terms of higher entry from higher financial not be bankable from a commercial viewpoint. This
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?

Figure 3: Identifying credit constraints

Do you have a loan?


Yes No
41.3% 58.7%

Have you applied for a loan?


Yes No
12.8% 87.2%

Why have you not applied for a loan?

No need for a loan—establishment has sufficient capital 55.70%

Interest rates are not favorable 14.70%

Application procedures for loans or lines of credit are complex 11.20%

Collateral requirements are too high 07.20%

Did not think it would be approved 05.40%

Other reason 05.90%

Source: The World Bank’s Enterprise Surveys and author’s calculations. Numbers reflect averages across all Enterprise Surveys between 2005 and 2009.

52
frontier—and thus the share of bankable SMEs (Point I, A) problems—calls for demand-side measures that educate
—is determined by technology as well as the institutional and encourage the healthy use of financial products by
framework within which financial institutions operate. SMEs. The problem of a lack of profitable investment
However, a financial system can very well operate either projects, on the other hand, has to be addressed through
below or above this frontier, as we will discuss. non–financial sector policies and is primarily not a
We can use the access possibilities frontier to identify problem of access to finance. The second problem calls
several types of access to credit problems. A first type for interventions and policies that encourage financial
of access problem is demand-originated. This problem institutions to maximize outreach to SMEs within the
may be evident in too low a number of loan applicants existing contractual and macroeconomic environment.
simply because of self-exclusion resulting from cultural Conversely, restraining measures may be called for when
barriers or financial illiteracy. Alternatively, there may be loans are being provided to numbers of applicants
a lack of profitable investment projects in the economy beyond which can be considered prudent. The final type
that deserve financing based on their expected return. A of problem, too low a prudent access frontier, requires a
second type of access problem can arise from regulatory set of policies that provide for general reforms of the
distortions or insufficient contestability that cause lenders business environment and institutional framework that
not to fully exploit all the outreach opportunities and are not specific to the SME lending market. However, as
thus settle at a point below the access possibilities fron- we will discuss in the next section, the business model
tier (Figure 2, Point II, B). A third and very different and lending techniques available to financial institutions
access problem is associated with “excess access,” that also have a critical impact on the frontier.
is, an equilibrium above the access possibilities frontier A mix of macro-level indicators of the business
with loans being granted to a larger share of loan environment and Enterprise Survey data can give us an
applicants than is prudently warranted, given the lend- indication of the possibilities frontier (bankable SME
ing interest rate and the institutional framework (Figure population), actual banked SME population, and the
2, Point III, C). A final access problem consists of too reasons for the gap.22 Figure 3 summarizes Enterprise
low a prudent access possibilities frontier, caused by Survey data and shows that a large share of enterprises
deficiencies in an economy’s institutional framework without access to credit have not applied for credit,
compared with that of countries with similar levels of and that they have a wide variation of reasons for not
economic development. doing so—ranging from lack of demand to cumbersome
Each of these types of access problems calls for application procedures and lack of assets that can serve
different policies. The first—demand-originated as collateral. We note, however, that high interest rates
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?
are also an important reason, which could either point credit-worthy buyers because it does not rely on infor-
to the lack of viable investment projects or macro- mation about the borrower, but rather on the obligor.28
economic instability leading to high rates. Such infor- Both leasing and factoring rely on a legal framework
mation, together with aggregate macroeconomic and to govern the transactions but rely to a lesser extent on
business environment, can be used to specify more the contractual framework of a country. Thus these
specifically the frontier and the bottlenecks to reaching techniques can help push a financial system toward the
and expanding the frontier.23 frontier of SME lending, even if this frontier is low.
Equity finance has not been stressed sufficiently as
a source of financing for SMEs. This form of finance
Business models can be a beneficial source of funding in the early stages
The traditional view of SME finance focuses on of an SME, when debt finance is not an option or the
relationship lending.24 Longstanding relationships enterprise has reached its leverage limit. Although some
between a financial institution, or even a specific loan developed and emerging markets have established second-
officer, and the borrower allow problems of information tier SME stock exchanges, most developing countries
asymmetry and thus risk to be overcome. Relationship- lack the necessary scale, demand, and infrastructure to
based lending, however, might be more costly, moving do so. Venture capitalists, including angel financiers, and
the equilibrium away from the possibilities frontier private equity funds can be helpful in this context.
discussed earlier. Recently the more nuanced view has
been put forward that large and foreign banks, relative
to other institutions, can have a comparative advantage Policies
at financing SMEs through arms-length lending tech- The access possibilities frontier derived earlier allows us
nologies, such as asset-based lending, factoring, leasing, to discuss different policies to alleviate SMEs’ financing
fixed-asset lending, credit scoring, and centralized constraints and define government’s role. Specifically, we
organizational structures.25 will distinguish among market-developing policies that
The debate on relationship- vs. transaction-based will help push out the frontier, market-enabling policies
lending techniques also has implications for which that push incumbent and new financial institutions
institutions can cater cost-effectively to SMEs. toward the existing frontier, and market-harnessing 53
Relationship lending might be better done by small, policies that prevent the financial system from moving
community-based financial institutions, while transaction- beyond the frontier toward a point of financial fragility.
based lending is more cost-effectively done by large Market developing policies aim at pushing out the
financial institutions that can exploit the necessary frontier and include reforms in the contractual and
economies of scale that investment in technology informational frameworks and macroeconomic perform-
implies. In many developing countries, this debate has ance. While these reforms are not specific to the SME
an additional dimension, because smaller banks are often lending market, they will help level the playing field
owned by domestic shareholders, while large financial between small and large enterprises. Among the reform
institutions are often foreign-owned. priorities in this category, credit bureau and legal system
Using data for 91 banks across 45 countries, reforms feature prominently. The appropriate policies in
researchers find that foreign banks are more likely this case would span a wide range: from titling land prop-
than domestic banks to use transaction-based lending erty to upgrading laws that affect collateral repossession
techniques and more centralized business models.26 or execution of guarantees; from modernizing corporate
However, they also show that foreign banks do not tend reorganization and bankruptcy proceedings to improving
to lend less to SMEs than other banks. It thus seems the functioning of the judiciary; and from raising
that both relationship- and transaction-based lending accounting and disclosure standards to establishing the
techniques are appropriate for SME lending, and that appropriate legal framework and right incentives for
both domestic and foreign-owned banks can cater to the development of credit registries, be they private or
SMEs.27 public. A growing literature has shown the importance
There are also specific transaction-based lending of credit registries for small firms’ access to external
techniques that seem especially conducive for expanding finance.29
SMEs’ access to external finance. Leasing is an attractive Institutional reforms (even credit registries) can
financing tool for SMEs—from the perspective of take a long time to materialize. To the extent that a
both demand and supply—because it is based on the financial system is operating below the possibilities
cash flow of the financed asset, such as machinery or frontier, there is room for market-enabling policies that
vehicle, rather than the reputation or the asset base of may foster the broadening of access even in the absence
the enterprise. It also often includes tax advantages, and of perceptible changes in the institutional framework.
it allows for easier recovery if the correct legal frame- Where the lack of profitable, credit-deserving investment
work is in place. Factoring, the discounting of accounts projects is the main problem, non–financial sector
receivables, is attractive for small suppliers of large policies are called for. Where the main reason for being
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?

below the possibilities frontier is the demand problem of private providers, even where the latter would be will-
self-exclusion, the appropriate policies would emphasize ing to enter because of changes in the general business
raising financial literacy. If the main problems lie in sub- environment or because of technological advances.
optimization of the credit supply, by contrast, a wider Political subversion of these programs often leads to
range of policy options can be considered, starting with corruption and the channeling of funds to political
competition policy that allows the entry of new players— cronies or to specific electoral groups.33
be they banks or non-bank financial institutions—into A final group of policies, which we define as market-
the market. Regulatory policies can also be important harnessing, tries to prevent the financial system from
to push the system toward the frontier of SME lending, moving to an unsustainable equilibrium beyond the
including regulatory frameworks that enable leasing frontier through imprudent lending. Such imprudent
and factoring. Loan classification and provisioning rules lending binges can arise from the same competition
can also affect SMEs’ access to finance, through reliance that market-enabling policies try to foster if they are
less on collateral than on forward-looking assessment of not accompanied by a properly defined regulatory
payment performance. and supervisory framework. Market-harnessing policies
Beyond targeting competition per se, governments therefore aim at keeping banks’ incentives to take
can also try to encourage movement toward the pos- aggressive risks in check through a mix of measures aimed
sibilities frontier by addressing hindrances such as at strengthening market and supervisory discipline.
coordination failures, first mover disincentives, and Policymakers have to strike a fine balance between
obstacles to risk distribution and sharing. Although not market-enabling policies that push financial institutions
easy to define in general terms because of their wide toward the frontier and market-harnessing policies that
variety, these government interventions tend to share prevent them from moving beyond the frontier, with
a common feature in creating incentives for private the balance varying from country to country.
lenders and investors to step in, without unduly shift-
ing risks and costs to the government.30 Among such
policies are partial credit guarantees.31 Although they Conclusions
also exist on a private basis, governments and donors This paper has discussed the results of research over the
54 have been aggressively pushing to establish partial credit past 10 years in the area of SME finance. Although we
guarantees to overcome the limited access to bank have learned a lot thus far, there is still a lot more to
credit faced by SMEs. By providing a partial guarantee, be learned. First, more data are needed, both on the
such a scheme can help overcome the lack of collateral importance of SMEs in the real economy and on their
of most SMEs, but issues of appropriate pricing, fund- financing. The Enterprise Surveys have provided enor-
ing, and institutional structure are important. Although mous opportunities for analysts and researchers, but
such schemes could be run on a self-sustainable basis, still lack information—such as more detailed financing
they often involve significant subsidies and contingent information—on many aspects of firms’ financial lives.
fiscal liabilities to cover losses. While it is difficult to Panel samples, where firms are revisited at regular
compute such costs ex ante, it is even more difficult to intervals—as is the case in the Business Environment
measure the benefits, which would be partially captured and Enterprise Performance Surveys (BEEPS) for former
by additionality—that is, the share of borrowers that transition economies—would be good for a larger and
would not have gained access to finance if it were not broader sample of countries to test for the effect of
for the partial credit guarantee. There are only a few policy reforms or changes in financial market structure
rigorous impact assessments of such schemes, but such over time. Surveys of informal enterprises and their
evaluations are urgently needed given the popularity constraints can provide additional important insights.
of this policy tool.32 Databases on entrepreneurs,34 along with surveys of
Although the government often does not intervene potential and actual entrepreneurs,35 can provide impor-
directly in the market in the case of most PCG schemes— tant insight into the demand side of SME finance. In
if credit assessment and monitoring remains with the addition, impact evaluation of specific private interven-
banks—the past 40 years have seen many examples of tions, as well as business models and government policies
market-substituting policies to foster SME lending, with and interventions—such as partial credit guarantee
the balance of results tipping heavily into the negative. schemes, for example—are urgently called for. The
Such policies include directed credit, often combined microfinance industry has benefitted substantially from
with interest rate subsidies, and the establishment of the impact assessments that started some 10 years ago,
development finance institutions focused on SME lend- and a similar undertaking might be very useful for the
ing. These policies share the problems of all government- area of SME finance.
managed financial sector programs—the trade-off In terms of policy recommendations, we have
between commercial and social goals results in high losses learned not only about the power of financial sector
and the non-sustainability of many of these programs. reform in fostering SME access to external finance,
Undercutting market conditions results in crowding out but also about the role of specific interventions, such as
1.3: SME Finance: What Have We Learned and What Do We Need to Learn?
credit registries. However, one size does not fit all. The 25 See Berger and Udell 2006 and de la Torre et al. 2010.

concept of the access possibilities frontier described 26 Beck et al. 2010a.


above allows a more rigorous analysis of bottlenecks for 27 This is consistent with evidence from the transition economies,
SME finance in a specific country. This has to take into where foreign banks went quickly down-market after their entry
de Haas and Naaborg 2005.
account that the population of SMEs differs significantly
28 Klapper 2006.
across countries, ranging from large number of micro-
enterprises in many African countries to more formal 29 See, among others, Brown et al. 2009.

small businesses in East Asia. 30 De la Torre et al. 2006.


A final caveat: while stressing the importance of 31 See Beck et al. 2010b for an overview.
SME finance, one should not overlook other growth 32 See Lelarge et al. 2010 for an assessment of the French credit
constraints SMEs face that can make any alleviation guarantee scheme.
of financing constraints useless. Finally, although SME 33 Cole 2009; Dinc 2005; and Khwaja and Mian 2005.
constraints are an important growth constraint, the net 34 Klapper et al., 2010.
benefit of any government intervention in this area
35 Djankov et al., 2006.
should be compared with the net benefit of inter-
ventions in other areas, such as health or education.

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Part 2
Country/Economy Profiles
How to Read the Country/Economy Profiles
How to Read the Country/Economy Profiles

The Profiles section presents a four-page profile for


each of the 57 economies covered by The Financial Argentina
Development Report 2010. Key indicators Financial assets by major type, 2008
Population (millions), 2009 .......................................................40.1 18.3%
US$ bn
GDP (US$ billions), 2009 .........................................................310.1 Public debt securities .......159.7
GDP (current prices) per capita, 2009 ..............................7,725.7 Private debt securities........16.9
GDP (PPP) as share (%) of world total, 2009 ........................0.81 55.8% Banking deposits .................57.1
20.0% Equity securities ..................52.3
Compound annual growth rate of real GDP (%), 2005–09 ..4.88
Total 286.0
5.9%

Page 1 Total/GDP 87.0%

Financial Development Index 2010

Key indicators 2010 Index......................................................52 2.8


Rank (out of 57) Score (1–7 scale)

1 2 3 4 5 6 7

The first section of each Country/Economy Profile 1st pillar: Institutional environment .........................................52
Factors, policies, and institutions

3.2
INPUTS

Financial sector liberalization ....................................................49 2.7

presents a selection of key indicators: Corporate governance.................................................................48


Legal and regulatory issues .......................................................56
Contract enforcement..................................................................43
3.8
2.6
3.7
2nd pillar: Business environment .............................................42 4.0
Human capital ...............................................................................27 4.4
Taxes...............................................................................................53 3.4
Infrastructure ................................................................................35 3.7
Cost of doing business ................................................................44 4.5

• Population, GDP, and related data come from the 3rd pillar: Financial stability......................................................54
Currency stability..........................................................................31
3.2
3.9
Banking system stability..............................................................53 3.3

International Monetary Fund’s World Economic Risk of sovereign debt crisis ......................................................54 2.5
1 2 3 4 5 6 7

Financial intermediation

Outlook of April 2010. 4th pillar: Banking financial services......................................43


Size index.......................................................................................46
2.9
1.4
Efficiency index.............................................................................54 3.1
Financial information disclosure..................................................2 5.7
5th pillar: Non-banking financial services .............................25 2.5
IPO activity.....................................................................................41 1.4
M&A activity..................................................................................50 1.2

Financial assets by major type, 2008 Insurance .......................................................................................30


Securitization...................................................................................7
6th pillar: Financial markets......................................................53
2.7
4.6
1.4
Foreign exchange markets .........................................................44 1.0
Derivatives markets....................................................................n/a n/a
Equity market development ........................................................53 1.2
Bond market development..........................................................39 1.9

• Public debt figures are from the Economist


1 2 3 4 5 6 7

Financial access 59
Intelligence Unit’s CountryData Database, as 7th pillar: Financial access........................................................56
Commercial access......................................................................56
Retail access.................................................................................40
2.2
2.4
2.0
1 2 3 4 5 6 7

accessed in August 2010. Private debt data come OUTPUTS

N For further details and explanation, please refer to “How Read the Country/Economy Profiles.”

from the Bank of International Settlements


Quarterly Review, June 2010, and are presented
as of 2009. Data on bank deposits are from the
IMF International Financial Statistics database, Financial Development Index
electronic version, accessed September 2010 or This section details the economy’s performance on
the June 2009 PDF version. Equity securities data the various components of the Financial Development
were downloaded from the market capitalization Index (FDI). At the top is the country’s overall rank
dataset on the World Bank’s World Development out of 57 economies, its score on the 1-to-7 scale, and
Indicators database in September 2010. a graphical representation of the score.
Below, the seven pillars of the Index are organized
• The four financial asset indicators (public and thematically. The three themes—factors, policies, and
private debt securities, banking deposits, and equity institutions; financial intermediation; and financial
securities) are added to measure total financial assets access—are displayed according to their role in the
in the Index economies. The share of depth attrib- continuum of the financial system from inputs to outputs.
utable to each component is displayed in the pie After the pillar or subpillar name, the first column
chart. Percentages displayed may not add to 100 shows each economy’s rank for that pillar or subpillar
percent because of rounding. Private debt data among the 57 economies included in the Index. The sec-
were not available for Bangladesh, Jordan, Morocco, ond column presents the score for that pillar or subpillar
or Romania. on the 1-to-7 normalized scale. On the right, the nor-
malized score is represented graphically. For more infor-
• The total financial assets data are shown as a mation on the methodology and results of the FDI,
percentage of GDP, using the GDP figure from please refer to Chapter 1.1 of this Report.
the Key indicators section.

• The pie chart shows the share of total financial


assets attributable to each of the four types of
financial asset indicators in a given economy.
How to Read the Country/Economy Profiles

Pages 2–4
The Financial Development Index in detail Argentina
Financial Development Index in detail Development Advantage Development Disadvantage

These pages present the rank achieved by a country on INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment

each of the indicators entering the composition of the 1.01


1.02
Financial sector liberalization
Capital account liberalization .................................................48 ..... ...............–0.8
Commitments to WTO agreement on trade in services.......40 ..... ...............43.5
Multiple (26) ..........................2.5
Turkey ..................................83.5
1.03 Domestic financial sector liberalization .................................37 ..... .................1.0 Multiple (35)...........................1.0

FDI. Indicators are organized by pillar. Please refer to 1.04


Corporate governance
Extent of incentive-based compensation ..............................39 ..... .................4.1 Canada...................................5.2
1.05 Efficacy of corporate boards .................................................48 ..... .................4.2 Sweden .................................5.9

Appendix A of Chapter 1.1 for a detailed structure of 1.06


1.07
1.08
Reliance on professional management .................................37 .....
Willingness to delegate.........................................................38 .....
Strength of auditing and reporting standards .......................55 .....
.................4.5
.................3.7
.................3.8
Sweden .................................6.5
Sweden .................................6.5
South Africa...........................6.4
1.09 Ethical behavior of firms........................................................52 ..... .................3.3 Sweden .................................6.8

the FDI. 1.10

1.11
Protection of minority shareholders’ interests ......................52 .....

Legal and regulatory issues


Burden of government regulation .........................................49 .....
.................3.5

.................2.6
Sweden .................................6.0

Singapore ..............................5.5
1.12 Centralization of economic policymaking ..............................56 ..... .................1.7 Switzerland ............................5.6

Next to the rank, a colored square indicates whether 1.13


1.14
1.15
Regulation of securities exchanges.......................................51 .....
Property rights.......................................................................55 .....
Intellectual property protection .............................................56 .....
.................3.6
.................2.7
.................2.5
South Africa...........................6.0
Switzerland ............................6.4
Sweden .................................6.2
1.16 Diversion of public funds.......................................................55 ..... .................2.1 Sweden .................................6.5

the indicator constitutes an advantage (blue square) or a 1.17


1.18
1.19
Public trust of politicians .......................................................56 .....
Corruption perceptions index ................................................46 .....
Strength of legal rights index ................................................40 .....
.................1.5
.................2.9
.................4.0
Singapore ..............................6.4
Denmark................................9.3
Multiple (3)...........................10.0
1.20 Central bank transparency.....................................................29 ..... .................7.5 Sweden ...............................15.0

disadvantage (black square) for the country. 1.21


Contract enforcement
Effectiveness of law-making bodies ......................................53 ..... .................2.2 Singapore ..............................6.5
1.22 Judicial independence ...........................................................54 ..... .................2.6 Sweden .................................6.6

In order to identify variables as advantages or dis- 1.23


1.24
1.25
Irregular payments in judicial decisions.................................49 .....
Time to enforce a contract ....................................................40 .....
Number of procedures to enforce a contract .......................34 .....
.................3.1
.............590.0
...............36.0
Sweden .................................6.8
Singapore...........................150.0
Ireland..................................20.0
1.26 Strength of investor protection index....................................44 ..... .................4.7 Singapore ..............................9.3

advantages, the following rules were applied: 1.27 Cost of enforcing contracts ...................................................12 ..... ...............16.5 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools............................................13 ..... .................5.3 Switzerland ............................6.1
2.02 Quality of math and science education.................................46 ..... .................3.2 Singapore ..............................6.5
2.03 Extent of staff training...........................................................41 ..... .................3.8 Sweden .................................5.7

• For those economies ranked in the top 10 in 2.04

2.05
Local availability of specialized research
and training services .............................................................31 .....
Brain drain and ease of hiring foreign labor ..........................34 .....
.................4.5
.................3.9
Switzerland ............................6.5
Switzerland ............................5.7
2.06 Tertiary enrollment.................................................................14 ..... ...............67.1 Korea, Rep...........................94.7

the overall FDI, individual variables ranked from 2.07


Taxes
Irregular payments in tax collection ......................................48 ..... .................3.7 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.......57 ..... .................2.3 Singapore ..............................5.8

1 through 10 are considered to be advantages. 2.09


2.10
Marginal tax variation ............................................................25 ..... .................5.6
Time to pay taxes..................................................................46 ..... .............453.0

Infrastructure
China..................................–24.6
United Arab Emirates ..........12.0

2.11 Quality of overall infrastructure .............................................50 ..... .................3.5 Switzerland ............................6.8

Any variables below 10 are considered to be dis- 2.12


2.13
2.14
Quality of telephone infrastructure .......................................46 .....
Internet users .......................................................................39 .....
Broadband Internet subscribers ............................................31 .....
.................5.6
...............28.1
.................8.0
Norway...................................7.0
Sweden ................................87.8
Sweden................................41.2
2.15 Telephone lines......................................................................31 ..... ...............24.4 Switzerland ..........................64.1

advantages. For instance, in the case of Switzerland, 2.16 Mobile telephone subscribers...............................................21 .....

Cost of doing business


.............116.6 Turkey ................................208.7

2.17 Cost of starting a business ...................................................38 ..... ................11.0 Denmark................................0.0

which is ranked 8 overall, its 6th rank in the (Cont’d.)

variable Bank deposits to GDP makes this variable


a development advantage, whereas Foreign exchange
derivatives turnover: Currency swaps, on which it ranks
24th, constitutes a development disadvantage for the
• In the gray box at the right of the profile is the
country.
name and raw score for the top-ranked economy
of the given indicator. For indicators in which there
• For those economies ranked from 11 through 27
60 is a tie for the top rank, the word Multiple appears
in the overall FDI, variables ranked higher than
with the number of economies that share that score
the economy’s overall rank are considered to be
in parentheses.
advantages. Any variables ranked equal to or lower
than the economy’s overall rank are considered to
be disadvantages. In the case of Malaysia, ranked
18th overall, its 10th rank in the variable Bank
deposits to GDP makes this variable a development
advantage, whereas Foreign exchange derivatives turnover:
Currency swaps, on which it ranks 30th, constitutes
a development disadvantage for the country.

• For those economies ranked lower than 27 in


the overall FDI, any individual variables ranked 27
or higher are considered as advantages. Any variables
ranked 28th or lower are considered to be disadvan-
tages. For Argentina, ranked 52nd overall, its rank of
22 in Relative value-added of insurance constitutes a
development advantage for the country, whereas its
56th rank in the variable Bank deposits to GDP
makes this variable a development disadvantage.

• After the advantage/disadvantage marker is the


raw score of the listed indicator for the profiled
economy. For more information on the significance
of the raw score, such as the units in which it is
measured or the source, please see the Data Tables
in Part 3 of this Report.
List of Countries/Economies
List of Countries/Economies

Country/Economy Page Country/Economy Page

Argentina 62 Philippines 214


Australia 66 Poland 218
Austria 70 Romania* 222
Bahrain 74 Russian Federation 226
Bangladesh 78 Saudi Arabia 230
Belgium 82 Singapore 234
Brazil 86 Slovak Republic 238
Canada 90 South Africa 242
Chile 94 Spain 246
China 98 Sweden 250
Colombia 102 Switzerland 254
Czech Republic 106 Thailand 258
Denmark 110 Turkey 262
Egypt 114 Ukraine 266
Finland 118 United Arab Emirates 270
61
France 122 United Kingdom 274
Germany 126 United States 278
Hong Kong SAR 130 Venezuela 282
Hungary 134 Vietnam 286
India 138 * Added in 2010
Indonesia 142
Ireland 146
Israel 150
Italy 154
Japan 158
Jordan 162
Kazakhstan 166
Korea, Rep. 170
Kuwait 174
Malaysia 178
Mexico 182
Morocco* 186
Netherlands 190
Nigeria 194
Norway 198
Pakistan 202
Panama 206
Peru 210
2: Country/Economy Profiles

Argentina
Key indicators Financial assets by major type, 2008
Population (millions), 2009 .......................................................40.1 18.3%
US$ bn
GDP (US$ billions), 2009 .........................................................310.1
n Public debt securities .......159.7
GDP (current prices) per capita, 2009 ..............................7,725.7 n Private debt securities........16.9
GDP (PPP) as share (%) of world total, 2009 ........................0.81 55.8% n Banking deposits .................57.1
20.0% n Equity securities ..................52.3
Compound annual growth rate of real GDP (%), 2005–09 ..4.88
Total 286.0
5.9%

Total/GDP 87.0%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index......................................................52 2.8


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................52 3.2


Financial sector liberalization ....................................................49 2.7
Corporate governance.................................................................48 3.8
Legal and regulatory issues .......................................................56 2.6
Contract enforcement..................................................................43 3.7
2nd pillar: Business environment .............................................42 4.0
Human capital ...............................................................................27 4.4
62
Taxes...............................................................................................53 3.4
Infrastructure ................................................................................35 3.7
Cost of doing business ................................................................44 4.5
3rd pillar: Financial stability......................................................54 3.2
Currency stability..........................................................................31 3.9
Banking system stability..............................................................53 3.3
Risk of sovereign debt crisis ......................................................54 2.5
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services......................................43 2.9


Size index .......................................................................................46 1.4
Efficiency index.............................................................................54 3.1
Financial information disclosure..................................................2 5.7
5th pillar: Non-banking financial services .............................25 2.5
IPO activity.....................................................................................41 1.4
M&A activity..................................................................................50 1.2
Insurance .......................................................................................30 2.7
Securitization...................................................................................7 4.6
6th pillar: Financial markets......................................................53 1.4
Foreign exchange markets .........................................................44 1.0
Derivatives markets....................................................................n/a n/a
Equity market development ........................................................53 1.2
Bond market development..........................................................39 1.9
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access........................................................56 2.2


Commercial access......................................................................56 2.4
Retail access.................................................................................40 2.0
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Argentina

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization .................................................48 .....n ...............–0.8 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services.......40 .....n...............43.5 Turkey ..................................83.5
1.03 Domestic financial sector liberalization .................................37 .....n .................1.0 Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ..............................39 .....n.................4.1 Canada...................................5.2
1.05 Efficacy of corporate boards .................................................48 .....n.................4.2 Sweden .................................5.9
1.06 Reliance on professional management .................................37 .....n.................4.5 Sweden .................................6.5
1.07 Willingness to delegate.........................................................38 .....n.................3.7 Sweden .................................6.5
1.08 Strength of auditing and reporting standards .......................55 .....n.................3.8 South Africa...........................6.4
1.09 Ethical behavior of firms........................................................52 .....n.................3.3 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ......................52 .....n.................3.5 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation .........................................49 .....n.................2.6 Singapore ..............................5.5
1.12 Centralization of economic policymaking ..............................56 .....n .................1.7 Switzerland ............................5.6
1.13 Regulation of securities exchanges.......................................51 .....n.................3.6 South Africa...........................6.0
1.14 Property rights.......................................................................55 .....n.................2.7 Switzerland ............................6.4
1.15 Intellectual property protection .............................................56 .....n.................2.5 Sweden .................................6.2
1.16 Diversion of public funds.......................................................55 .....n.................2.1 Sweden .................................6.5
1.17 Public trust of politicians .......................................................56 .....n .................1.5 Singapore ..............................6.4
1.18 Corruption perceptions index ................................................46 .....n.................2.9 Denmark................................9.3
1.19 Strength of legal rights index ................................................40 .....n.................4.0 Multiple (3)...........................10.0
1.20 Central bank transparency.....................................................29 .....n .................7.5 Sweden ...............................15.0 63
Contract enforcement
1.21 Effectiveness of law-making bodies ......................................53 .....n.................2.2 Singapore ..............................6.5
1.22 Judicial independence ...........................................................54 .....n.................2.6 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................49 .....n.................3.1 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................40 .....n.............590.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .......................34 .....n...............36.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................44 .....n.................4.7 Singapore ..............................9.3
1.27 Cost of enforcing contracts ...................................................12 .....n ...............16.5 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools............................................13 .....n.................5.3 Switzerland ............................6.1
2.02 Quality of math and science education.................................46 .....n.................3.2 Singapore ..............................6.5
2.03 Extent of staff training...........................................................41 .....n.................3.8 Sweden .................................5.7
2.04 Local availability of specialized research
and training services .............................................................31 .....n.................4.5 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor ..........................34 .....n.................3.9 Switzerland ............................5.7
2.06 Tertiary enrollment.................................................................14 .....n ...............67.1 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ......................................48 .....n.................3.7 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.......57 .....n.................2.3 Singapore ..............................5.8
2.09 Marginal tax variation ............................................................25 .....n.................5.6 China..................................–24.6
2.10 Time to pay taxes..................................................................46 .....n.............453.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure .............................................50 .....n.................3.5 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .......................................46 .....n.................5.6 Norway...................................7.0
2.13 Internet users .......................................................................39 .....n...............28.1 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................31 .....n.................8.0 Sweden................................41.2
2.15 Telephone lines......................................................................31 .....n...............24.4 Switzerland ..........................64.1
2.16 Mobile telephone subscribers...............................................21 .....n .............116.6 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business ...................................................38 .....n................11.0 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Argentina
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................47 .....n .................7.0 Saudi Arabia...........................0.0
2.19 Cost of closing a business ....................................................29 .....n ...............12.0 Multiple (4).............................1.0
2.20 Time to start a business........................................................38 .....n ...............27.0 Australia.................................2.0
2.21 Time to register property ......................................................44 .....n...............52.0 Multiple (3) ............................2.0
2.22 Time to close a business ......................................................33 .....n.................2.8 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) .....................45 .....n ...............–1.6 Venezuela ............................14.5
3.02 External vulnerability indicator...............................................26 .....n .............100.2 Saudi Arabia ...........................7.0
3.03 Current account balance to GDP...........................................24 .....n.................2.2 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator ........................................31 .....n...............25.8 Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) .....................20 .....n...............38.2 China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)..........................................................n/a .........................n/a Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises..................................................57 .....n.................4.5 Multiple (10)...........................0.0
3.08 Financial strengths indicator..................................................41 .....n.................3.0 Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles ...........................13 .....n.................5.9 Ireland....................................6.8
3.10 Financial Stress Index .............................................................8 .....n .................1.2 Thailand ...............................–0.2
3.11 Tier 1 capital ratio .................................................................n/a .........................n/a Jordan..................................16.8
64 3.12 Output loss during banking crises.........................................55 .....n .............165.9 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating.............................................55 .....n.................5.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating .........................................55 .....n.................5.0 Multiple (13) ........................20.0
3.15 Aggregate macroprudential indicator ....................................35 .....n.................4.8 Panama..................................6.0
3.16 Manageability of public debt ................................................32 .....n...............48.7 Chile ......................................6.1
3.17 Credit default swap spreads .................................................51 .....n.............970.1 Norway ................................25.9

4th pillar: Banking financial services


Size index
4.01 Deposit money bank assets to GDP .....................................53 .....n...............20.5 Denmark ............................219.5
4.02 Central bank assets to GDP ..................................................10 .....n.................5.8 Egypt ...................................23.8
4.03 Financial system deposits to GDP ........................................53 .....n...............20.1 Hong Kong SAR ................285.2
4.04 M2 to GDP ............................................................................57 .....n ...............27.6 Hong Kong SAR ................329.5
4.05 Private credit to GDP.............................................................53 .....n ...............14.0 United States.....................210.7
4.06 Bank deposits to GDP ...........................................................56 .....n...............20.1 Hong Kong SAR ................289.1
4.07 Money market instruments to GDP ......................................23 .....n.................0.0 Ireland..................................43.6

Efficiency index
4.08 Aggregate profitability indicator ............................................52 .....n.................2.4 Netherlands ...........................6.5
4.09 Bank overhead costs .............................................................54 .....n .................7.7 Singapore ..............................0.5
4.10 Public ownership of banks ....................................................35 .....n................11.7 Austria ...................................0.0
4.11 Bank operating costs to assets .............................................57 .....n .................7.0 Ireland....................................0.6
4.12 Non-performing bank loans to total loans .............................16 .....n.................3.1 Australia .................................1.1

Financial information disclosure


4.13 Private credit bureau coverage................................................1 .....n .............100.0 Argentina ...........................100.0
4.14 Public credit registry coverage ................................................5 .....n...............34.3 China ...................................62.1

5th pillar: Non-banking financial services


IPO activity
5.01 IPO market share ..................................................................34 .....n.................0.4 China ...................................22.0
5.02 IPO proceeds amount ...........................................................32 .....n.................0.2 Kazakhstan.............................1.1
5.03 Share of world IPOs ..............................................................44 .....n.................0.2 China....................................12.6
Argentina

2: Country/Economy Profiles
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

5th pillar: Non-banking financial services (cont’d.)


M&A activity
5.04 M&A market share ................................................................44 .....n.................0.1 United States ......................36.0
5.05 M&A transaction value to GDP .............................................51 .....n .................1.3 Netherlands .........................14.2
5.06 Share of total number of M&A deals ....................................40 .....n.................0.3 United States ......................23.0
Insurance
5.07 Life insurance density ...........................................................44 .....n.................0.5 Ireland..................................15.6
5.08 Non–life insurance density ...................................................24 .....n.................2.1 Netherlands ...........................9.4
5.09 Real growth of direct insurance premiums .............................8 .....n.................0.1 China .....................................0.3
5.10 Life insurance coverage ........................................................38 .....n.................0.2 India.....................................55.4
5.11 Non–life insurance coverage .................................................21 .....n.................0.8 China....................................14.6
5.12 Relative value-added of insurance to GDP ............................22 .....n .................1.3 Bahrain ..................................5.9
Securitization
5.13 Securitization to GDP ............................................................29 .....n .................1.2 United States.......................10.8
5.14 Share of total number of securitization deals .........................4 .....n.................3.1 United States .......................61.7

6th pillar: Financial markets


Foreign exchange markets
6.01 Spot foreign exchange turnover ............................................38 .....n.................0.1 United Kingdom ..................26.3
6.02 Outright forward foreign exchange turnover .........................42 .....n.................0.0 United Kingdom ..................29.2
6.03 Foreign exchange swap turnover..........................................n/a .........................n/a United Kingdom ..................40.8

Derivatives markets
65
6.04 Interest rate derivatives turnover: Forward rate
agreements ..........................................................................n/a .........................n/a United Kingdom ..................45.1
6.05 Interest rate derivatives turnover: Swaps.............................n/a .........................n/a United Kingdom ..................45.8
6.06 Interest rate derivatives turnover: Options...........................n/a .........................n/a United States ......................42.4
6.07 Foreign exchange derivatives turnover: Currency swaps .....n/a .........................n/a United Kingdom ..................46.7
6.08 Foreign exchange derivatives turnover: Options ..................n/a .........................n/a United Kingdom ..................42.4

Equity market development


6.09 Stock market turnover ratio ...................................................45 .....n................17.0 Italy....................................348.2
6.10 Stock market capitalization to GDP .......................................46 .....n...............30.4 Hong Kong SAR ................603.5
6.11 Stock market value traded to GDP........................................40 .....n.................4.8 Switzerland ........................541.2
6.12 Number of listed companies per 10,000 people...................38 .....n.................0.0 Hong Kong SAR .....................1.3

Bond market development


6.13 Private domestic bond market capitalization to GDP ............33 .....n.................3.6 Denmark ............................175.7
6.14 Public domestic bond market capitalization to GDP .............36 .....n ...............16.2 Japan .................................184.6
6.15 Private international bonds to GDP .......................................45 .....n.................2.0 Ireland................................215.3
6.16 Public international bonds to GDP ..........................................8 .....n ...............15.1 Panama................................34.1
6.17 Local currency corporate bond issuance to GDP ..................38 .....n.................0.0 Thailand .................................3.7

7th pillar: Financial access


Commercial access
7.01 Financial market sophistication .............................................55 .....n.................3.4 Switzerland ............................6.6
7.02 Venture capital availability......................................................57 .....n .................1.9 Hong Kong SAR ....................4.4
7.03 Ease of access to credit........................................................48 .....n.................2.4 Indonesia ...............................4.3
7.04 Financing through local equity market ..................................55 .....n.................2.4 Hong Kong SAR ....................5.2
7.05 Ease of access to loans ........................................................57 .....n .................1.7 Bahrain ..................................4.9
7.06 Foreign direct investment to GDP.........................................40 .....n.................2.9 Hong Kong SAR ..................29.9

Retail access
7.07 Market penetration of bank accounts ...................................23 .....n........90,628.8 Japan............................717,241.6
7.08 Commercial bank branches ...................................................31 .....n ...............13.2 Ireland ..................................57.3
7.09 Total number of ATMs...........................................................36 .....n...............36.9 Canada...............................218.5
7.10 Total number of point of sale (POS) devices ........................n/a .........................n/a Austria .............................4,174.1
7.11 Microfinance institution (MFI) borrowers’
penetration rate .....................................................................21 .....n.................0.8 Bangladesh ..........................41.2
2: Country/Economy Profiles

Australia
Key indicators Financial assets by major type, 2008
6.1%
Population (millions), 2009 .......................................................21.9 US$ bn
23.5%
GDP (US$ billions), 2009 .........................................................997.2
n Public debt securities .......175.5
GDP (current prices) per capita, 2009 ............................45,586.5 n Private debt securities...1,186.8
GDP (PPP) as share (%) of world total, 2009 ........................1.17 41.4% n Banking deposits ...............831.9
Compound annual growth rate of real GDP (%), 2005–09 ..2.19 n Equity securities ................675.6

29.0% Total 2,869.9

Total/GDP 270.9%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index........................................................5 5.0


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................18 5.5


Financial sector liberalization ....................................................28 5.3
Corporate governance...................................................................8 5.5
Legal and regulatory issues .........................................................7 5.4
Contract enforcement....................................................................7 5.7
2nd pillar: Business environment .............................................13 5.5
Human capital ...............................................................................11 5.2
66
Taxes...............................................................................................20 5.1
Infrastructure ................................................................................18 5.4
Cost of doing business ..................................................................6 6.3
3rd pillar: Financial stability........................................................9 5.2
Currency stability..........................................................................42 3.3
Banking system stability................................................................9 5.5
Risk of sovereign debt crisis ........................................................1 6.7
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services........................................7 5.1


Size index .........................................................................................8 4.3
Efficiency index...............................................................................4 6.4
Financial information disclosure..................................................3 4.0
5th pillar: Non-banking financial services ...............................8 4.0
IPO activity.......................................................................................9 3.5
M&A activity....................................................................................5 5.3
Insurance .......................................................................................17 3.3
Securitization.................................................................................11 3.8
6th pillar: Financial markets........................................................6 4.7
Foreign exchange markets ...........................................................7 4.8
Derivatives markets .......................................................................5 6.7
Equity market development ..........................................................5 5.3
Bond market development..........................................................23 2.6
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access..........................................................1 5.2


Commercial access......................................................................11 4.1
Retail access...................................................................................1 6.4
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Australia

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization .................................................30 .....n .................1.2 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services.......37 .....n...............28.8 Turkey ..................................83.5
1.03 Domestic financial sector liberalization ...................................1 .....n .................1.0 Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ................................8 .....n.................4.9 Canada...................................5.2
1.05 Efficacy of corporate boards ...................................................6 .....n.................5.5 Sweden .................................5.9
1.06 Reliance on professional management ...................................7 .....n.................6.0 Sweden .................................6.5
1.07 Willingness to delegate .........................................................10 .....n.................4.9 Sweden .................................6.5
1.08 Strength of auditing and reporting standards .........................8 .....n.................5.8 South Africa...........................6.4
1.09 Ethical behavior of firms..........................................................9 .....n.................6.2 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ........................9 .....n.................5.2 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation .........................................21 .....n.................3.4 Singapore ..............................5.5
1.12 Centralization of economic policymaking ................................6 .....n.................4.4 Switzerland ............................5.6
1.13 Regulation of securities exchanges.........................................8 .....n.................5.5 South Africa...........................6.0
1.14 Property rights .......................................................................12 .....n.................5.9 Switzerland ............................6.4
1.15 Intellectual property protection..............................................11 .....n.................5.6 Sweden .................................6.2
1.16 Diversion of public funds.......................................................10 .....n.................5.8 Sweden .................................6.5
1.17 Public trust of politicians........................................................11 .....n.................4.6 Singapore ..............................6.4
1.18 Corruption perceptions index ..................................................7 .....n.................8.7 Denmark................................9.3
1.19 Strength of legal rights index ..................................................4 .....n.................9.0 Multiple (3)...........................10.0
1.20 Central bank transparency.....................................................14 .....n ...............10.5 Sweden ...............................15.0 67
Contract enforcement
1.21 Effectiveness of law-making bodies ........................................3 .....n.................5.7 Singapore ..............................6.5
1.22 Judicial independence .............................................................7 .....n.................6.3 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................15 .....n.................6.2 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................15 .....n.............395.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .........................8 .....n...............28.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................27 .....n.................5.7 Singapore ..............................9.3
1.27 Cost of enforcing contracts...................................................21 .....n...............20.7 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools............................................14 .....n.................5.3 Switzerland ............................6.1
2.02 Quality of math and science education.................................12 .....n.................4.9 Singapore ..............................6.5
2.03 Extent of staff training...........................................................16 .....n.................4.8 Sweden .................................5.7
2.04 Local availability of specialized research
and training services .............................................................18 .....n.................5.3 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor ..........................24 .....n.................4.2 Switzerland ............................5.7
2.06 Tertiary enrollment ..................................................................9 .....n...............75.1 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ......................................15 .....n.................6.2 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition .......17 .....n.................4.5 Singapore ..............................5.8
2.09 Marginal tax variation ............................................................30 .....n.................9.0 China..................................–24.6
2.10 Time to pay taxes ..................................................................10 .....n..............107.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure .............................................23 .....n.................5.2 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .......................................44 .....n.................5.9 Norway...................................7.0
2.13 Internet users .......................................................................14 .....n...............72.0 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................14 .....n...............24.4 Sweden................................41.2
2.15 Telephone lines......................................................................13 .....n...............44.5 Switzerland ..........................64.1
2.16 Mobile telephone subscribers...............................................28 .....n .............105.0 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business .....................................................9 .....n.................0.8 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Australia
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................36 .....n.................4.9 Saudi Arabia...........................0.0
2.19 Cost of closing a business ....................................................17 .....n.................8.0 Multiple (4).............................1.0
2.20 Time to start a business..........................................................1 .....n.................2.0 Australia.................................2.0
2.21 Time to register property ........................................................5 .....n.................5.0 Multiple (3) ............................2.0
2.22 Time to close a business ........................................................8 .....n .................1.0 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) .....................24 .....n .................1.5 Venezuela ............................14.5
3.02 External vulnerability indicator..............................................n/a .........................n/a Saudi Arabia ...........................7.0
3.03 Current account balance to GDP...........................................49 .....n ...............–4.9 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator ..........................................1 .....n.................0.0 Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) ....................n/a .........................n/a China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)...........................................................15 .....n .............–61.2 Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises....................................................1 .....n.................0.0 Multiple (10)...........................0.0
3.08 Financial strengths indicator....................................................1 .....n.................9.0 Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles...........................31 .....n.................4.7 Ireland....................................6.8
3.10 Financial Stress Index............................................................15 .....n.................3.8 Thailand ...............................–0.2
3.11 Tier 1 capital ratio..................................................................33 .....n.................8.1 Jordan..................................16.8
68 3.12 Output loss during banking crises...........................................1 .....n.................0.0 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating...............................................1 .....n...............20.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating ...........................................1 .....n...............20.0 Multiple (13) ........................20.0
3.15 Aggregate macroprudential indicator.....................................14 .....n.................5.6 Panama..................................6.0
3.16 Manageability of public debt ..................................................9 .....n...............22.0 Chile ......................................6.1
3.17 Credit default swap spreads..................................................12 .....n...............59.6 Norway ................................25.9

4th pillar: Banking financial services


Size index
4.01 Deposit money bank assets to GDP .....................................15 .....n .............121.2 Denmark ............................219.5
4.02 Central bank assets to GDP ....................................................7 .....n.................6.2 Egypt ...................................23.8
4.03 Financial system deposits to GDP ........................................12 .....n ...............97.6 Hong Kong SAR ................285.2
4.04 M2 to GDP ............................................................................18 .....n...............99.4 Hong Kong SAR ................329.5
4.05 Private credit to GDP.............................................................12 .....n .............121.4 United States.....................210.7
4.06 Bank deposits to GDP ...........................................................13 .....n...............98.1 Hong Kong SAR ................289.1
4.07 Money market instruments to GDP ........................................7 .....n.................5.0 Ireland..................................43.6

Efficiency index
4.08 Aggregate profitability indicator ..............................................9 .....n.................5.1 Netherlands ...........................6.5
4.09 Bank overhead costs .............................................................15 .....n .................1.6 Singapore ..............................0.5
4.10 Public ownership of banks ....................................................22 .....n.................2.9 Austria ...................................0.0
4.11 Bank operating costs to assets .............................................17 .....n .................1.3 Ireland....................................0.6
4.12 Non-performing bank loans to total loans ...............................1 .....n .................1.1 Australia .................................1.1

Financial information disclosure


4.13 Private credit bureau coverage................................................1 .....n .............100.0 Argentina ...........................100.0
4.14 Public credit registry coverage ..............................................24 .....n.................0.0 China ...................................62.1

5th pillar: Non-banking financial services


IPO activity
5.01 IPO market share ....................................................................9 .....n.................2.1 China ...................................22.0
5.02 IPO proceeds amount ...........................................................23 .....n.................0.3 Kazakhstan.............................1.1
5.03 Share of world IPOs ................................................................9 .....n.................5.0 China....................................12.6
Australia

2: Country/Economy Profiles
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

5th pillar: Non-banking financial services (cont’d.)


M&A activity
5.04 M&A market share ................................................................11 .....n.................3.0 United States ......................36.0
5.05 M&A transaction value to GDP ...............................................7 .....n ...............10.5 Netherlands .........................14.2
5.06 Share of total number of M&A deals ......................................6 .....n.................4.2 United States ......................23.0
Insurance
5.07 Life insurance density ...........................................................20 .....n.................3.3 Ireland..................................15.6
5.08 Non–life insurance density ...................................................18 .....n.................2.8 Netherlands ...........................9.4
5.09 Real growth of direct insurance premiums ...........................12 .....n.................0.1 China .....................................0.3
5.10 Life insurance coverage ........................................................21 .....n.................0.7 India.....................................55.4
5.11 Non–life insurance coverage .................................................29 .....n.................0.6 China....................................14.6
5.12 Relative value-added of insurance to GDP ............................12 .....n.................2.1 Bahrain ..................................5.9
Securitization
5.13 Securitization to GDP ............................................................12 .....n.................2.8 United States.......................10.8
5.14 Share of total number of securitization deals........................15 .....n .................1.0 United States .......................61.7

6th pillar: Financial markets


Foreign exchange markets
6.01 Spot foreign exchange turnover ..............................................6 .....n.................3.5 United Kingdom ..................26.3
6.02 Outright forward foreign exchange turnover ...........................8 .....n.................3.4 United Kingdom ..................29.2
6.03 Foreign exchange swap turnover ............................................7 .....n.................5.0 United Kingdom ..................40.8

Derivatives markets
69
6.04 Interest rate derivatives turnover: Forward rate
agreements ...........................................................................10 .....n .................1.1 United Kingdom ..................45.1
6.05 Interest rate derivatives turnover: Swaps..............................10 .....n .................1.1 United Kingdom ..................45.8
6.06 Interest rate derivatives turnover: Options............................12 .....n.................0.5 United States ......................42.4
6.07 Foreign exchange derivatives turnover: Currency swaps ........3 .....n.................5.6 United Kingdom ..................46.7
6.08 Foreign exchange derivatives turnover: Options .....................8 .....n .................1.9 United Kingdom ..................42.4

Equity market development


6.09 Stock market turnover ratio ...................................................13 .....n .............141.2 Italy....................................348.2
6.10 Stock market capitalization to GDP .........................................9 .....n .............162.6 Hong Kong SAR ................603.5
6.11 Stock market value traded to GDP..........................................9 .....n.............236.1 Switzerland ........................541.2
6.12 Number of listed companies per 10,000 people.....................4 .....n .................1.0 Hong Kong SAR .....................1.3

Bond market development


6.13 Private domestic bond market capitalization to GDP ..............8 .....n...............60.3 Denmark ............................175.7
6.14 Public domestic bond market capitalization to GDP .............35 .....n................17.2 Japan .................................184.6
6.15 Private international bonds to GDP .......................................12 .....n ...............51.1 Ireland................................215.3
6.16 Public international bonds to GDP ........................................36 .....n .................1.5 Panama................................34.1
6.17 Local currency corporate bond issuance to GDP ..................31 .....n.................0.2 Thailand .................................3.7

7th pillar: Financial access


Commercial access
7.01 Financial market sophistication..............................................10 .....n.................6.1 Switzerland ............................6.6
7.02 Venture capital availability........................................................9 .....n.................3.8 Hong Kong SAR ....................4.4
7.03 Ease of access to credit .......................................................35 .....n.................2.7 Indonesia ...............................4.3
7.04 Financing through local equity market...................................11 .....n.................4.6 Hong Kong SAR ....................5.2
7.05 Ease of access to loans.........................................................12 .....n.................3.9 Bahrain ..................................4.9
7.06 Foreign direct investment to GDP.........................................21 .....n.................4.7 Hong Kong SAR ..................29.9

Retail access
7.07 Market penetration of bank accounts ..................................n/a .........................n/a Japan............................717,241.6
7.08 Commercial bank branches ...................................................11 .....n ...............31.9 Ireland ..................................57.3
7.09 Total number of ATMs.............................................................3 .....n .............156.7 Canada...............................218.5
7.10 Total number of point of sale (POS) devices...........................2 .....n..........4,039.6 Austria .............................4,174.1
7.11 Microfinance institution (MFI) borrowers’
penetration rate ....................................................................n/a .........................n/a Bangladesh ..........................41.2
2: Country/Economy Profiles

Austria
Key indicators Financial assets by major type, 2008
6.1%
Population (millions), 2009 .........................................................8.3 21.9% US$ bn
GDP (US$ billions), 2009 .........................................................381.9
n Public debt securities .......259.9
GDP (current prices) per capita, 2009 ............................45,989.2 30.8% n Private debt securities......487.9
GDP (PPP) as share (%) of world total, 2009 ........................0.46 n Banking deposits ...............364.9
Compound annual growth rate of real GDP (%), 2005–09 ..1.05 n Equity securities ..................72.3

Total 1,185.0
41.2%

Total/GDP 285.7%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index......................................................19 4.2


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................12 5.7


Financial sector liberalization ......................................................1 7.0
Corporate governance.................................................................13 5.1
Legal and regulatory issues .......................................................12 5.1
Contract enforcement..................................................................16 5.4
2nd pillar: Business environment .............................................16 5.4
Human capital ...............................................................................18 4.8
70
Taxes...............................................................................................11 5.7
Infrastructure ................................................................................10 5.8
Cost of doing business ................................................................28 5.2
3rd pillar: Financial stability......................................................21 4.8
Currency stability..........................................................................33 3.9
Banking system stability..............................................................26 4.7
Risk of sovereign debt crisis ......................................................11 5.9
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services......................................18 4.2


Size index .......................................................................................16 3.7
Efficiency index.............................................................................18 5.7
Financial information disclosure................................................32 2.2
5th pillar: Non-banking financial services .............................40 2.0
IPO activity.....................................................................................28 2.0
M&A activity..................................................................................29 2.0
Insurance .......................................................................................34 2.6
Securitization.................................................................................46 1.3
6th pillar: Financial markets......................................................21 2.9
Foreign exchange markets .........................................................20 1.4
Derivatives markets .....................................................................22 2.4
Equity market development ........................................................34 2.2
Bond market development............................................................4 4.9
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access..........................................................8 4.5


Commercial access......................................................................32 3.5
Retail access...................................................................................4 5.6
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Austria

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization ...................................................1 .....n.................2.5 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services.........1 .....n ...............71.6 Turkey ..................................83.5
1.03 Domestic financial sector liberalization ...................................1 .....n .................1.0 Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ..............................21 .....n.................4.5 Canada...................................5.2
1.05 Efficacy of corporate boards .................................................20 .....n.................5.0 Sweden .................................5.9
1.06 Reliance on professional management .................................17 .....n.................5.3 Sweden .................................6.5
1.07 Willingness to delegate .........................................................15 .....n.................4.6 Sweden .................................6.5
1.08 Strength of auditing and reporting standards........................10 .....n.................5.7 South Africa...........................6.4
1.09 Ethical behavior of firms ........................................................10 .....n.................6.2 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ......................22 .....n.................4.8 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation .........................................13 .....n.................3.6 Singapore ..............................5.5
1.12 Centralization of economic policymaking ................................9 .....n.................4.4 Switzerland ............................5.6
1.13 Regulation of securities exchanges.......................................28 .....n.................4.7 South Africa...........................6.0
1.14 Property rights.........................................................................6 .....n.................6.2 Switzerland ............................6.4
1.15 Intellectual property protection ...............................................8 .....n.................5.7 Sweden .................................6.2
1.16 Diversion of public funds.......................................................13 .....n.................5.7 Sweden .................................6.5
1.17 Public trust of politicians .......................................................15 .....n.................4.0 Singapore ..............................6.4
1.18 Corruption perceptions index ................................................13 .....n .................7.9 Denmark................................9.3
1.19 Strength of legal rights index ................................................19 .....n .................7.0 Multiple (3)...........................10.0
1.20 Central bank transparency.......................................................3 .....n................11.0 Sweden ...............................15.0 71
Contract enforcement
1.21 Effectiveness of law-making bodies ......................................16 .....n.................4.4 Singapore ..............................6.5
1.22 Judicial independence ...........................................................14 .....n.................5.8 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................13 .....n.................6.3 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................17 .....n .............397.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .........................4 .....n...............25.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................52 .....n.................4.0 Singapore ..............................9.3
1.27 Cost of enforcing contracts ...................................................17 .....n...............18.0 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools ...........................................23 .....n.................4.9 Switzerland ............................6.1
2.02 Quality of math and science education.................................20 .....n.................4.7 Singapore ..............................6.5
2.03 Extent of staff training...........................................................13 .....n.................4.9 Sweden .................................5.7
2.04 Local availability of specialized research
and training services ...............................................................6 .....n.................5.9 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor ..........................30 .....n.................3.9 Switzerland ............................5.7
2.06 Tertiary enrollment ................................................................27 .....n ...............51.1 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ......................................12 .....n.................6.3 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.......20 .....n.................4.5 Singapore ..............................5.8
2.09 Marginal tax variation ............................................................13 .....n ...............–9.6 China..................................–24.6
2.10 Time to pay taxes..................................................................20 .....n .............171.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure ...............................................5 .....n.................6.4 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .........................................9 .....n.................6.8 Norway...................................7.0
2.13 Internet users .......................................................................15 .....n ...............71.2 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................19 .....n...............20.7 Sweden................................41.2
2.15 Telephone lines......................................................................19 .....n...............39.4 Switzerland ..........................64.1
2.16 Mobile telephone subscribers.................................................9 .....n .............129.7 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business ...................................................23 .....n.................5.1 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Austria
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................34 .....n.................4.5 Saudi Arabia...........................0.0
2.19 Cost of closing a business ....................................................39 .....n...............18.0 Multiple (4).............................1.0
2.20 Time to start a business........................................................41 .....n...............28.0 Australia.................................2.0
2.21 Time to register property ......................................................29 .....n...............32.0 Multiple (3) ............................2.0
2.22 Time to close a business.......................................................11 .....n .................1.1 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) .....................36 .....n.................0.4 Venezuela ............................14.5
3.02 External vulnerability indicator..............................................n/a .........................n/a Saudi Arabia ...........................7.0
3.03 Current account balance to GDP...........................................21 .....n.................2.7 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator ..........................................1 .....n.................0.0 Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) ....................n/a .........................n/a China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)...........................................................10 .....n .............–15.5 Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises..................................................35 .....n.................2.0 Multiple (10)...........................0.0
3.08 Financial strengths indicator..................................................32 .....n.................4.0 Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles...........................25 .....n.................5.0 Ireland....................................6.8
3.10 Financial Stress Index............................................................12 .....n .................1.9 Thailand ...............................–0.2
3.11 Tier 1 capital ratio..................................................................22 .....n................11.0 Jordan..................................16.8
72 3.12 Output loss during banking crises.........................................29 .....n...............34.0 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating...............................................1 .....n...............20.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating ...........................................1 .....n...............20.0 Multiple (13) ........................20.0
3.15 Aggregate macroprudential indicator ....................................25 .....n.................5.3 Panama..................................6.0
3.16 Manageability of public debt ................................................46 .....n ...............67.1 Chile ......................................6.1
3.17 Credit default swap spreads..................................................16 .....n...............89.2 Norway ................................25.9

4th pillar: Banking financial services


Size index
4.01 Deposit money bank assets to GDP .....................................12 .....n .............123.0 Denmark ............................219.5
4.02 Central bank assets to GDP ..................................................23 .....n .................1.4 Egypt ...................................23.8
4.03 Financial system deposits to GDP ........................................15 .....n...............89.3 Hong Kong SAR ................285.2
4.04 M2 to GDP ............................................................................16 .....n .............105.3 Hong Kong SAR ................329.5
4.05 Private credit to GDP.............................................................13 .....n ..............111.6 United States.....................210.7
4.06 Bank deposits to GDP ...........................................................16 .....n...............89.0 Hong Kong SAR ................289.1
4.07 Money market instruments to GDP ........................................9 .....n.................3.9 Ireland..................................43.6

Efficiency index
4.08 Aggregate profitability indicator ............................................34 .....n.................4.1 Netherlands ...........................6.5
4.09 Bank overhead costs .............................................................37 .....n.................3.2 Singapore ..............................0.5
4.10 Public ownership of banks ......................................................1 .....n.................0.0 Austria ...................................0.0
4.11 Bank operating costs to assets .............................................24 .....n .................1.6 Ireland....................................0.6
4.12 Non-performing bank loans to total loans .............................10 .....n.................2.3 Australia .................................1.1

Financial information disclosure


4.13 Private credit bureau coverage..............................................27 .....n...............39.2 Argentina ...........................100.0
4.14 Public credit registry coverage ..............................................19 .....n .................1.4 China ...................................62.1

5th pillar: Non-banking financial services


IPO activity
5.01 IPO market share ..................................................................22 .....n.................0.9 China ...................................22.0
5.02 IPO proceeds amount ...........................................................18 .....n.................0.4 Kazakhstan.............................1.1
5.03 Share of world IPOs ..............................................................40 .....n.................0.2 China....................................12.6
Austria

2: Country/Economy Profiles
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

5th pillar: Non-banking financial services (cont’d.)


M&A activity
5.04 M&A market share ................................................................24 .....n.................0.5 United States ......................36.0
5.05 M&A transaction value to GDP .............................................28 .....n.................4.3 Netherlands .........................14.2
5.06 Share of total number of M&A deals ....................................29 .....n.................0.5 United States ......................23.0
Insurance
5.07 Life insurance density ...........................................................22 .....n.................2.7 Ireland..................................15.6
5.08 Non–life insurance density ...................................................12 .....n.................3.3 Netherlands ...........................9.4
5.09 Real growth of direct insurance premiums ...........................31 .....n.................0.0 China .....................................0.3
5.10 Life insurance coverage ........................................................37 .....n.................0.2 India.....................................55.4
5.11 Non–life insurance coverage .................................................38 .....n.................0.3 China....................................14.6
5.12 Relative value-added of insurance to GDP ............................31 .....n .................1.0 Bahrain ..................................5.9
Securitization
5.13 Securitization to GDP ............................................................45 .....n.................0.5 United States.......................10.8
5.14 Share of total number of securitization deals .......................44 .....n.................0.1 United States .......................61.7

6th pillar: Financial markets


Foreign exchange markets
6.01 Spot foreign exchange turnover ............................................20 .....n.................0.4 United Kingdom ..................26.3
6.02 Outright forward foreign exchange turnover .........................19 .....n.................0.4 United Kingdom ..................29.2
6.03 Foreign exchange swap turnover ..........................................20 .....n.................0.5 United Kingdom ..................40.8

Derivatives markets
73
6.04 Interest rate derivatives turnover: Forward rate
agreements ...........................................................................20 .....n.................0.2 United Kingdom ..................45.1
6.05 Interest rate derivatives turnover: Swaps..............................18 .....n.................0.3 United Kingdom ..................45.8
6.06 Interest rate derivatives turnover: Options............................20 .....n.................0.1 United States ......................42.4
6.07 Foreign exchange derivatives turnover: Currency swaps ......18 .....n.................0.5 United Kingdom ..................46.7
6.08 Foreign exchange derivatives turnover: Options ...................16 .....n.................0.3 United Kingdom ..................42.4

Equity market development


6.09 Stock market turnover ratio ...................................................26 .....n...............69.5 Italy....................................348.2
6.10 Stock market capitalization to GDP .......................................34 .....n...............63.5 Hong Kong SAR ................603.5
6.11 Stock market value traded to GDP........................................28 .....n...............42.7 Switzerland ........................541.2
6.12 Number of listed companies per 10,000 people ..................n/a .........................n/a Hong Kong SAR .....................1.3

Bond market development


6.13 Private domestic bond market capitalization to GDP ..............6 .....n...............60.7 Denmark ............................175.7
6.14 Public domestic bond market capitalization to GDP .............22 .....n...............32.1 Japan .................................184.6
6.15 Private international bonds to GDP .......................................10 .....n...............66.8 Ireland................................215.3
6.16 Public international bonds to GDP ..........................................3 .....n...............28.5 Panama................................34.1
6.17 Local currency corporate bond issuance to GDP ..................10 .....n.................2.0 Thailand .................................3.7

7th pillar: Financial access


Commercial access
7.01 Financial market sophistication .............................................22 .....n.................5.6 Switzerland ............................6.6
7.02 Venture capital availability......................................................30 .....n.................2.9 Hong Kong SAR ....................4.4
7.03 Ease of access to credit........................................................42 .....n.................2.6 Indonesia ...............................4.3
7.04 Financing through local equity market ..................................38 .....n.................3.8 Hong Kong SAR ....................5.2
7.05 Ease of access to loans ........................................................27 .....n.................3.2 Bahrain ..................................4.9
7.06 Foreign direct investment to GDP.........................................31 .....n.................3.5 Hong Kong SAR ..................29.9

Retail access
7.07 Market penetration of bank accounts .....................................5 .....n......240,270.8 Japan............................717,241.6
7.08 Commercial bank branches ...................................................12 .....n ...............27.5 Ireland ..................................57.3
7.09 Total number of ATMs.............................................................7 .....n .............118.9 Canada...............................218.5
7.10 Total number of point of sale (POS) devices...........................1 .....n ..........4,174.1 Austria .............................4,174.1
7.11 Microfinance institution (MFI) borrowers’
penetration rate ....................................................................n/a .........................n/a Bangladesh ..........................41.2
2: Country/Economy Profiles

Bahrain
Key indicators Financial assets by major type, 2008
11.5%
Population (millions), 2009 .........................................................1.0 US$ bn
GDP (US$ billions), 2009 ...........................................................20.2 11.4%
n Public debt securities ...........5.6
GDP (current prices) per capita, 2009 ............................19,455.3 n Private debt securities..........5.6
43.0%
GDP (PPP) as share (%) of world total, 2009 ........................0.04 n Banking deposits .................16.8
Compound annual growth rate of real GDP (%), 2005–09 ..4.70 n Equity securities ..................21.2

Total 49.3
34.2%

Total/GDP 232.1%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index......................................................23 4.0


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................21 5.0


Financial sector liberalization ....................................................15 6.7
Corporate governance.................................................................24 4.8
Legal and regulatory issues .......................................................25 4.2
Contract enforcement..................................................................31 4.3
2nd pillar: Business environment .............................................14 5.5
Human capital ...............................................................................32 4.3
74
Taxes.................................................................................................1 6.4
Infrastructure ................................................................................22 5.1
Cost of doing business ................................................................10 6.0
3rd pillar: Financial stability......................................................23 4.7
Currency stability..........................................................................50 2.4
Banking system stability................................................................3 5.9
Risk of sovereign debt crisis ......................................................22 5.5
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services......................................14 4.6


Size index .....................................................................................n/a n/a
Efficiency index.............................................................................14 5.9
Financial information disclosure................................................36 2.0
5th pillar: Non-banking financial services .............................38 2.0
IPO activity...................................................................................n/a n/a
M&A activity..................................................................................27 2.3
Insurance .......................................................................................28 2.7
Securitization.................................................................................56 1.0
6th pillar: Financial markets......................................................42 1.7
Foreign exchange markets .........................................................35 1.1
Derivatives markets .....................................................................31 1.3
Equity market development ........................................................27 2.5
Bond market development ........................................................n/a n/a
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access..........................................................9 4.5


Commercial access........................................................................6 4.5
Retail access ...............................................................................n/a n/a
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Bahrain

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization ...................................................1 .....n.................2.2 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services .......17 .....n...............54.0 Turkey ..................................83.5
1.03 Domestic financial sector liberalization ...................................1 .....n .................1.0 Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ..............................22 .....n.................4.5 Canada...................................5.2
1.05 Efficacy of corporate boards..................................................16 .....n.................5.0 Sweden .................................5.9
1.06 Reliance on professional management .................................42 .....n.................4.2 Sweden .................................6.5
1.07 Willingness to delegate.........................................................23 .....n.................4.2 Sweden .................................6.5
1.08 Strength of auditing and reporting standards........................12 .....n.................5.6 South Africa...........................6.4
1.09 Ethical behavior of firms........................................................21 .....n.................5.3 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ......................13 .....n.................5.1 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation ...........................................9 .....n.................4.0 Singapore ..............................5.5
1.12 Centralization of economic policymaking ..............................41 .....n.................2.8 Switzerland ............................5.6
1.13 Regulation of securities exchanges .......................................10 .....n.................5.4 South Africa...........................6.0
1.14 Property rights .......................................................................16 .....n.................5.6 Switzerland ............................6.4
1.15 Intellectual property protection .............................................18 .....n.................5.2 Sweden .................................6.2
1.16 Diversion of public funds.......................................................15 .....n.................5.3 Sweden .................................6.5
1.17 Public trust of politicians .......................................................14 .....n.................4.1 Singapore ..............................6.4
1.18 Corruption perceptions index ................................................24 .....n.................5.1 Denmark................................9.3
1.19 Strength of legal rights index ................................................40 .....n.................4.0 Multiple (3)...........................10.0
1.20 Central bank transparency.....................................................42 .....n.................3.5 Sweden ...............................15.0 75
Contract enforcement
1.21 Effectiveness of law-making bodies ......................................31 .....n.................3.7 Singapore ..............................6.5
1.22 Judicial independence ...........................................................20 .....n.................5.0 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................22 .....n.................5.5 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................45 .....n.............635.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .......................55 .....n...............48.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................27 .....n.................5.7 Singapore ..............................9.3
1.27 Cost of enforcing contracts ...................................................11 .....n ...............14.7 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools ...........................................27 .....n.................4.6 Switzerland ............................6.1
2.02 Quality of math and science education.................................26 .....n.................4.5 Singapore ..............................6.5
2.03 Extent of staff training...........................................................15 .....n.................4.9 Sweden .................................5.7
2.04 Local availability of specialized research
and training services .............................................................50 .....n.................3.9 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor...........................11 .....n.................4.8 Switzerland ............................5.7
2.06 Tertiary enrollment ................................................................41 .....n...............32.1 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ........................................6 .....n.................6.5 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.........3 .....n.................5.7 Singapore ..............................5.8
2.09 Marginal tax variation ..............................................................8 .....n .............–14.7 China..................................–24.6
2.10 Time to pay taxes....................................................................2 .....n...............36.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure .............................................19 .....n.................5.6 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .......................................27 .....n.................6.4 Norway...................................7.0
2.13 Internet users .......................................................................26 .....n...............52.0 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................25 .....n ...............14.2 Sweden................................41.2
2.15 Telephone lines......................................................................28 .....n...............28.4 Switzerland ..........................64.1
2.16 Mobile telephone subscribers.................................................2 .....n.............185.8 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business .....................................................4 .....n.................0.5 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Bahrain
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................10 .....n.................0.9 Saudi Arabia...........................0.0
2.19 Cost of closing a business ....................................................27 .....n ...............10.0 Multiple (4).............................1.0
2.20 Time to start a business........................................................14 .....n.................9.0 Australia.................................2.0
2.21 Time to register property ......................................................27 .....n ...............31.0 Multiple (3) ............................2.0
2.22 Time to close a business ......................................................30 .....n.................2.5 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) .....................50 .....n ...............–3.3 Venezuela ............................14.5
3.02 External vulnerability indicator...............................................35 .....n.............775.2 Saudi Arabia ...........................7.0
3.03 Current account balance to GDP.............................................8 .....n ...............10.2 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator .......................................n/a .........................n/a Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) .....................35 .....n .............169.6 China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)..........................................................n/a .........................n/a Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises....................................................1 .....n.................0.0 Multiple (10)...........................0.0
3.08 Financial strengths indicator..................................................22 .....n.................5.0 Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles ..........................n/a .........................n/a Ireland....................................6.8
3.10 Financial Stress Index...........................................................n/a .........................n/a Thailand ...............................–0.2
3.11 Tier 1 capital ratio .................................................................n/a .........................n/a Jordan..................................16.8
76 3.12 Output loss during banking crises...........................................1 .....n.................0.0 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating.............................................31 .....n ...............15.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating .........................................26 .....n ...............15.0 Multiple (13) ........................20.0
3.15 Aggregate macroprudential indicator ......................................2 .....n.................6.0 Panama..................................6.0
3.16 Manageability of public debt ................................................21 .....n...............38.8 Chile ......................................6.1
3.17 Credit default swap spreads .................................................37 .....n .............175.7 Norway ................................25.9

4th pillar: Banking financial services


Size index
4.01 Deposit money bank assets to GDP ....................................n/a .........................n/a Denmark ............................219.5
4.02 Central bank assets to GDP .................................................n/a .........................n/a Egypt ...................................23.8
4.03 Financial system deposits to GDP .......................................n/a .........................n/a Hong Kong SAR ................285.2
4.04 M2 to GDP ............................................................................19 .....n...............93.7 Hong Kong SAR ................329.5
4.05 Private credit to GDP ............................................................n/a .........................n/a United States.....................210.7
4.06 Bank deposits to GDP ...........................................................21 .....n...............79.3 Hong Kong SAR ................289.1
4.07 Money market instruments to GDP ......................................26 .....n.................0.0 Ireland..................................43.6

Efficiency index
4.08 Aggregate profitability indicator ..............................................6 .....n.................6.0 Netherlands ...........................6.5
4.09 Bank overhead costs .............................................................38 .....n.................3.5 Singapore ..............................0.5
4.10 Public ownership of banks ....................................................39 .....n................17.3 Austria ...................................0.0
4.11 Bank operating costs to assets .............................................13 .....n .................1.1 Ireland....................................0.6
4.12 Non-performing bank loans to total loans ............................n/a .........................n/a Australia .................................1.1

Financial information disclosure


4.13 Private credit bureau coverage..............................................28 .....n...............34.9 Argentina ...........................100.0
4.14 Public credit registry coverage ..............................................24 .....n.................0.0 China ...................................62.1

5th pillar: Non-banking financial services


IPO activity
5.01 IPO market share .................................................................n/a .........................n/a China ...................................22.0
5.02 IPO proceeds amount ..........................................................n/a .........................n/a Kazakhstan.............................1.1
5.03 Share of world IPOs .............................................................n/a .........................n/a China....................................12.6
Bahrain

2: Country/Economy Profiles
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

5th pillar: Non-banking financial services (cont’d.)


M&A activity
5.04 M&A market share ................................................................53 .....n.................0.0 United States ......................36.0
5.05 M&A transaction value to GDP .............................................14 .....n .................7.9 Netherlands .........................14.2
5.06 Share of total number of M&A deals ....................................55 .....n.................0.0 United States ......................23.0
Insurance
5.07 Life insurance density ...........................................................41 .....n.................0.7 Ireland..................................15.6
5.08 Non–life insurance density ...................................................33 .....n .................1.8 Netherlands ...........................9.4
5.09 Real growth of direct insurance premiums ..........................n/a .........................n/a China .....................................0.3
5.10 Life insurance coverage ........................................................56 .....n.................0.0 India.....................................55.4
5.11 Non–life insurance coverage .................................................56 .....n.................0.0 China....................................14.6
5.12 Relative value-added of insurance to GDP ..............................1 .....n.................5.9 Bahrain ..................................5.9
Securitization
5.13 Securitization to GDP ............................................................56 .....n.................0.1 United States.......................10.8
5.14 Share of total number of securitization deals .......................56 .....n.................0.0 United States .......................61.7

6th pillar: Financial markets


Foreign exchange markets
6.01 Spot foreign exchange turnover ............................................34 .....n.................0.1 United Kingdom ..................26.3
6.02 Outright forward foreign exchange turnover .........................26 .....n.................0.2 United Kingdom ..................29.2
6.03 Foreign exchange swap turnover ..........................................38 .....n.................0.0 United Kingdom ..................40.8

Derivatives markets
77
6.04 Interest rate derivatives turnover: Forward rate
agreements ..........................................................................n/a .........................n/a United Kingdom ..................45.1
6.05 Interest rate derivatives turnover: Swaps..............................29 .....n.................0.0 United Kingdom ..................45.8
6.06 Interest rate derivatives turnover: Options...........................n/a .........................n/a United States ......................42.4
6.07 Foreign exchange derivatives turnover: Currency swaps ......27 .....n.................0.1 United Kingdom ..................46.7
6.08 Foreign exchange derivatives turnover: Options ...................24 .....n.................0.1 United Kingdom ..................42.4

Equity market development


6.09 Stock market turnover ratio ...................................................48 .....n.................5.0 Italy....................................348.2
6.10 Stock market capitalization to GDP ......................................n/a .........................n/a Hong Kong SAR ................603.5
6.11 Stock market value traded to GDP .......................................n/a .........................n/a Switzerland ........................541.2
6.12 Number of listed companies per 10,000 people.....................9 .....n.................0.5 Hong Kong SAR .....................1.3

Bond market development


6.13 Private domestic bond market capitalization to GDP ...........n/a .........................n/a Denmark ............................175.7
6.14 Public domestic bond market capitalization to GDP.............n/a .........................n/a Japan .................................184.6
6.15 Private international bonds to GDP .......................................22 .....n...............26.1 Ireland................................215.3
6.16 Public international bonds to GDP ........................................25 .....n.................3.5 Panama................................34.1
6.17 Local currency corporate bond issuance to GDP .................n/a .........................n/a Thailand .................................3.7

7th pillar: Financial access


Commercial access
7.01 Financial market sophistication .............................................23 .....n.................5.5 Switzerland ............................6.6
7.02 Venture capital availability......................................................14 .....n.................3.7 Hong Kong SAR ....................4.4
7.03 Ease of access to credit ........................................................12 .....n.................3.8 Indonesia ...............................4.3
7.04 Financing through local equity market ..................................35 .....n.................3.9 Hong Kong SAR ....................5.2
7.05 Ease of access to loans ..........................................................1 .....n.................4.9 Bahrain ..................................4.9
7.06 Foreign direct investment to GDP .........................................11 .....n.................8.9 Hong Kong SAR ..................29.9

Retail access
7.07 Market penetration of bank accounts ..................................n/a .........................n/a Japan............................717,241.6
7.08 Commercial bank branches ..................................................n/a .........................n/a Ireland ..................................57.3
7.09 Total number of ATMs ..........................................................n/a .........................n/a Canada...............................218.5
7.10 Total number of point of sale (POS) devices ........................n/a .........................n/a Austria .............................4,174.1
7.11 Microfinance institution (MFI) borrowers’
penetration rate ....................................................................n/a .........................n/a Bangladesh ..........................41.2
2: Country/Economy Profiles

Bangladesh
Key indicators Financial assets by major type, 2008
8.1%
Population (millions), 2009 .....................................................164.7 US$ bn
GDP (US$ billions), 2009 ...........................................................94.5
n Public debt securities .........33.6
40.9%
GDP (current prices) per capita, 2009 .................................573.8 n Private debt securities.........n/a
GDP (PPP) as share (%) of world total, 2009 ........................0.35 n Banking deposits .................41.9
Compound annual growth rate of real GDP (%), 2005–09 ..4.83 n Equity securities ....................6.7
51.0% Total 82.2

Total/GDP 97.2%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index......................................................55 2.6


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................56 2.5


Financial sector liberalization ....................................................57 1.0
Corporate governance.................................................................57 3.4
Legal and regulatory issues .......................................................52 2.9
Contract enforcement..................................................................57 2.8
2nd pillar: Business environment .............................................57 2.8
Human capital ...............................................................................57 2.9
78
Taxes...............................................................................................48 3.9
Infrastructure ................................................................................57 2.0
Cost of doing business ................................................................57 2.4
3rd pillar: Financial stability......................................................30 4.5
Currency stability............................................................................7 5.5
Banking system stability..............................................................28 4.6
Risk of sovereign debt crisis ......................................................49 3.5
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services......................................45 2.8


Size index .......................................................................................36 2.1
Efficiency index.............................................................................44 4.3
Financial information disclosure................................................55 1.0
5th pillar: Non-banking financial services .............................57 1.1
IPO activity.....................................................................................47 1.2
M&A activity..................................................................................57 1.0
Insurance .......................................................................................54 1.3
Securitization.................................................................................56 1.0
6th pillar: Financial markets......................................................57 1.0
Foreign exchange markets........................................................n/a n/a
Derivatives markets....................................................................n/a n/a
Equity market development ........................................................55 1.0
Bond market development ........................................................n/a n/a
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access........................................................35 3.1


Commercial access......................................................................48 3.0
Retail access.................................................................................20 3.2
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Bangladesh

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization .................................................49 .....n ...............–1.1 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services.......49 .....n.................0.0 Turkey ..................................83.5
1.03 Domestic financial sector liberalization ................................n/a .........................n/a Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ..............................57 .....n.................2.9 Canada...................................5.2
1.05 Efficacy of corporate boards .................................................55 .....n.................4.0 Sweden .................................5.9
1.06 Reliance on professional management .................................48 .....n.................3.9 Sweden .................................6.5
1.07 Willingness to delegate.........................................................57 .....n.................2.8 Sweden .................................6.5
1.08 Strength of auditing and reporting standards .......................54 .....n.................3.8 South Africa...........................6.4
1.09 Ethical behavior of firms........................................................53 .....n.................3.3 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ......................53 .....n.................3.4 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation .........................................37 .....n.................2.9 Singapore ..............................5.5
1.12 Centralization of economic policymaking ..............................54 .....n .................1.9 Switzerland ............................5.6
1.13 Regulation of securities exchanges.......................................33 .....n.................4.4 South Africa...........................6.0
1.14 Property rights.......................................................................52 .....n.................3.4 Switzerland ............................6.4
1.15 Intellectual property protection .............................................54 .....n.................2.6 Sweden .................................6.2
1.16 Diversion of public funds.......................................................49 .....n.................2.6 Sweden .................................6.5
1.17 Public trust of politicians .......................................................46 .....n.................2.0 Singapore ..............................6.4
1.18 Corruption perceptions index ................................................52 .....n.................2.4 Denmark................................9.3
1.19 Strength of legal rights index ................................................19 .....n .................7.0 Multiple (3)...........................10.0
1.20 Central bank transparency....................................................n/a .........................n/a Sweden ...............................15.0 79
Contract enforcement
1.21 Effectiveness of law-making bodies ......................................42 .....n.................3.0 Singapore ..............................6.5
1.22 Judicial independence ...........................................................47 .....n.................3.4 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................48 .....n.................3.2 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................57 .....n ...........1442.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .......................48 .....n ...............41.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................15 .....n.................6.7 Singapore ..............................9.3
1.27 Cost of enforcing contracts...................................................56 .....n...............63.3 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools ...........................................46 .....n.................3.8 Switzerland ............................6.1
2.02 Quality of math and science education.................................45 .....n.................3.2 Singapore ..............................6.5
2.03 Extent of staff training...........................................................57 .....n.................3.1 Sweden .................................5.7
2.04 Local availability of specialized research
and training services .............................................................57 .....n.................3.0 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor ..........................55 .....n.................3.1 Switzerland ............................5.7
2.06 Tertiary enrollment ................................................................56 .....n .................7.2 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ......................................57 .....n.................2.3 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.......27 .....n.................4.2 Singapore ..............................5.8
2.09 Marginal tax variation ...........................................................n/a .........................n/a China..................................–24.6
2.10 Time to pay taxes..................................................................37 .....n.............302.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure .............................................55 .....n.................2.7 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .......................................53 .....n.................5.0 Norway...................................7.0
2.13 Internet users .......................................................................57 .....n.................0.4 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................57 .....n.................0.0 Sweden................................41.2
2.15 Telephone lines......................................................................57 .....n.................0.8 Switzerland ..........................64.1
2.16 Mobile telephone subscribers...............................................57 .....n ...............27.9 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business ...................................................54 .....n...............36.2 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Bangladesh
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................53 .....n ...............10.2 Saudi Arabia...........................0.0
2.19 Cost of closing a business ....................................................17 .....n.................8.0 Multiple (4).............................1.0
2.20 Time to start a business........................................................51 .....n...............44.0 Australia.................................2.0
2.21 Time to register property ......................................................57 .....n.............245.0 Multiple (3) ............................2.0
2.22 Time to close a business ......................................................43 .....n.................4.0 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) ....................n/a .........................n/a Venezuela ............................14.5
3.02 External vulnerability indicator.................................................5 .....n...............22.7 Saudi Arabia ...........................7.0
3.03 Current account balance to GDP...........................................25 .....n.................2.0 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator .......................................n/a .........................n/a Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) .....................12 .....n...............25.8 China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)..........................................................n/a .........................n/a Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises..................................................16 .....n .................1.0 Multiple (10)...........................0.0
3.08 Financial strengths indicator.................................................n/a .........................n/a Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles ..........................n/a .........................n/a Ireland....................................6.8
3.10 Financial Stress Index...........................................................n/a .........................n/a Thailand ...............................–0.2
3.11 Tier 1 capital ratio..................................................................44 .....n.................5.9 Jordan..................................16.8
80 3.12 Output loss during banking crises...........................................1 .....n.................0.0 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating.............................................51 .....n.................8.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating .........................................50 .....n.................8.0 Multiple (13) ........................20.0
3.15 Aggregate macroprudential indicator ....................................28 .....n.................5.2 Panama..................................6.0
3.16 Manageability of public debt ................................................20 .....n ...............37.5 Chile ......................................6.1
3.17 Credit default swap spreads.................................................n/a .........................n/a Norway ................................25.9

4th pillar: Banking financial services


Size index
4.01 Deposit money bank assets to GDP .....................................39 .....n...............52.9 Denmark ............................219.5
4.02 Central bank assets to GDP ....................................................8 .....n.................6.1 Egypt ...................................23.8
4.03 Financial system deposits to GDP ........................................37 .....n...............50.5 Hong Kong SAR ................285.2
4.04 M2 to GDP ............................................................................43 .....n...............50.4 Hong Kong SAR ................329.5
4.05 Private credit to GDP.............................................................44 .....n...............35.9 United States.....................210.7
4.06 Bank deposits to GDP ...........................................................38 .....n...............50.3 Hong Kong SAR ................289.1
4.07 Money market instruments to GDP ......................................26 .....n.................0.0 Ireland..................................43.6

Efficiency index
4.08 Aggregate profitability indicator ..............................................7 .....n.................5.2 Netherlands ...........................6.5
4.09 Bank overhead costs .............................................................28 .....n.................2.4 Singapore ..............................0.5
4.10 Public ownership of banks ....................................................54 .....n...............58.7 Austria ...................................0.0
4.11 Bank operating costs to assets .............................................38 .....n.................2.6 Ireland....................................0.6
4.12 Non-performing bank loans to total loans ............................n/a .........................n/a Australia .................................1.1

Financial information disclosure


4.13 Private credit bureau coverage..............................................49 .....n.................0.0 Argentina ...........................100.0
4.14 Public credit registry coverage ..............................................22 .....n.................0.9 China ...................................62.1

5th pillar: Non-banking financial services


IPO activity
5.01 IPO market share ..................................................................53 .....n.................0.0 China ...................................22.0
5.02 IPO proceeds amount ...........................................................48 .....n.................0.1 Kazakhstan.............................1.1
5.03 Share of world IPOs ..............................................................22 .....n.................0.7 China....................................12.6
Bangladesh

2: Country/Economy Profiles
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

5th pillar: Non-banking financial services (cont’d.)


M&A activity
5.04 M&A market share ................................................................57 .....n.................0.0 United States ......................36.0
5.05 M&A transaction value to GDP .............................................57 .....n.................0.2 Netherlands .........................14.2
5.06 Share of total number of M&A deals ....................................57 .....n.................0.0 United States ......................23.0
Insurance
5.07 Life insurance density ...........................................................42 .....n.................0.7 Ireland..................................15.6
5.08 Non–life insurance density ...................................................57 .....n.................0.2 Netherlands ...........................9.4
5.09 Real growth of direct insurance premiums ..........................n/a .........................n/a China .....................................0.3
5.10 Life insurance coverage.........................................................15 .....n .................1.1 India.....................................55.4
5.11 Non–life insurance coverage .................................................32 .....n.................0.4 China....................................14.6
5.12 Relative value-added of insurance to GDP ............................52 .....n.................0.5 Bahrain ..................................5.9
Securitization
5.13 Securitization to GDP ............................................................57 .....n.................0.0 United States.......................10.8
5.14 Share of total number of securitization deals .......................56 .....n.................0.0 United States .......................61.7

6th pillar: Financial markets


Foreign exchange markets
6.01 Spot foreign exchange turnover............................................n/a .........................n/a United Kingdom ..................26.3
6.02 Outright forward foreign exchange turnover ........................n/a .........................n/a United Kingdom ..................29.2
6.03 Foreign exchange swap turnover..........................................n/a .........................n/a United Kingdom ..................40.8

Derivatives markets
81
6.04 Interest rate derivatives turnover: Forward rate
agreements ..........................................................................n/a .........................n/a United Kingdom ..................45.1
6.05 Interest rate derivatives turnover: Swaps.............................n/a .........................n/a United Kingdom ..................45.8
6.06 Interest rate derivatives turnover: Options...........................n/a .........................n/a United States ......................42.4
6.07 Foreign exchange derivatives turnover: Currency swaps .....n/a .........................n/a United Kingdom ..................46.7
6.08 Foreign exchange derivatives turnover: Options ..................n/a .........................n/a United Kingdom ..................42.4

Equity market development


6.09 Stock market turnover ratio ..................................................n/a .........................n/a Italy....................................348.2
6.10 Stock market capitalization to GDP .......................................50 .....n................11.1 Hong Kong SAR ................603.5
6.11 Stock market value traded to GDP .......................................n/a .........................n/a Switzerland ........................541.2
6.12 Number of listed companies per 10,000 people...................45 .....n.................0.0 Hong Kong SAR .....................1.3

Bond market development


6.13 Private domestic bond market capitalization to GDP ...........n/a .........................n/a Denmark ............................175.7
6.14 Public domestic bond market capitalization to GDP.............n/a .........................n/a Japan .................................184.6
6.15 Private international bonds to GDP .......................................54 .....n.................0.0 Ireland................................215.3
6.16 Public international bonds to GDP ........................................51 .....n.................0.0 Panama................................34.1
6.17 Local currency corporate bond issuance to GDP .................n/a .........................n/a Thailand .................................3.7

7th pillar: Financial access


Commercial access
7.01 Financial market sophistication .............................................56 .....n.................3.2 Switzerland ............................6.6
7.02 Venture capital availability......................................................49 .....n.................2.2 Hong Kong SAR ....................4.4
7.03 Ease of access to credit ........................................................11 .....n.................3.9 Indonesia ...............................4.3
7.04 Financing through local equity market ....................................9 .....n.................4.6 Hong Kong SAR ....................5.2
7.05 Ease of access to loans ........................................................45 .....n.................2.6 Bahrain ..................................4.9
7.06 Foreign direct investment to GDP.........................................46 .....n .................1.1 Hong Kong SAR ..................29.9

Retail access
7.07 Market penetration of bank accounts ...................................36 .....n ........31,667.1 Japan............................717,241.6
7.08 Commercial bank branches ...................................................46 .....n.................5.2 Ireland ..................................57.3
7.09 Total number of ATMs ..........................................................n/a .........................n/a Canada...............................218.5
7.10 Total number of point of sale (POS) devices ........................n/a .........................n/a Austria .............................4,174.1
7.11 Microfinance institution (MFI) borrowers’
penetration rate .......................................................................1 .....n ...............41.2 Bangladesh ..........................41.2
2: Country/Economy Profiles

Belgium
Key indicators Financial assets by major type, 2008
9.0%
Population (millions), 2009 .......................................................10.8 US$ bn
24.5%
GDP (US$ billions), 2009 .........................................................470.4
n Public debt securities .......455.5
GDP (current prices) per capita, 2009 ............................43,533.3 25.9% n Private debt securities......755.3
GDP (PPP) as share (%) of world total, 2009 ........................0.55 n Banking deposits ...............482.9
Compound annual growth rate of real GDP (%), 2005–09 ..0.67 n Equity securities ................167.4

Total 1,861.2
40.6%
Total/GDP 367.6%

Financial Development Index 2010


Rank (out of 57) Score (1–7 scale)

2010 Index......................................................10 4.6


1 2 3 4 5 6 7

Factors, policies, and institutions INPUTS

1st pillar: Institutional environment .........................................13 5.6


Financial sector liberalization ......................................................1 7.0
Corporate governance.................................................................16 5.1
Legal and regulatory issues .......................................................14 4.8
Contract enforcement..................................................................13 5.5
2nd pillar: Business environment .............................................11 5.5
Human capital .................................................................................7 5.5
82
Taxes.................................................................................................8 5.8
Infrastructure ................................................................................12 5.7
Cost of doing business ................................................................29 5.2
3rd pillar: Financial stability......................................................19 4.8
Currency stability........................................................................n/a n/a
Banking system stability..............................................................29 4.5
Risk of sovereign debt crisis ......................................................25 5.3
1 2 3 4 5 6 7

Financial intermediation

4th pillar: Banking financial services........................................9 4.9


Size index .......................................................................................14 3.9
Efficiency index...............................................................................3 6.4
Financial information disclosure................................................15 3.7
5th pillar: Non-banking financial services .............................23 2.5
IPO activity.....................................................................................26 2.0
M&A activity..................................................................................22 2.7
Insurance .......................................................................................24 2.8
Securitization.................................................................................22 2.6
6th pillar: Financial markets......................................................13 4.1
Foreign exchange markets .........................................................12 2.3
Derivatives markets .....................................................................11 5.3
Equity market development ........................................................25 2.9
Bond market development............................................................1 5.6
1 2 3 4 5 6 7

Financial access

7th pillar: Financial access..........................................................3 5.1


Commercial access........................................................................7 4.4
Retail access...................................................................................2 5.8
1 2 3 4 5 6 7
OUTPUTS

Note: For further details and explanation, please refer to “How Read the Country/Economy Profiles.”
Belgium

2: Country/Economy Profiles
Financial Development Index in detail n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

1st pillar: Institutional environment


Financial sector liberalization
1.01 Capital account liberalization ...................................................1 .....n.................2.5 Multiple (26) ..........................2.5
1.02 Commitments to WTO agreement on trade in services.........1 .....n...............72.8 Turkey ..................................83.5
1.03 Domestic financial sector liberalization ...................................1 .....n .................1.0 Multiple (35)...........................1.0

Corporate governance
1.04 Extent of incentive-based compensation ..............................24 .....n.................4.4 Canada...................................5.2
1.05 Efficacy of corporate boards..................................................18 .....n.................5.0 Sweden .................................5.9
1.06 Reliance on professional management .................................15 .....n.................5.5 Sweden .................................6.5
1.07 Willingness to delegate .........................................................12 .....n.................4.8 Sweden .................................6.5
1.08 Strength of auditing and reporting standards........................15 .....n.................5.6 South Africa...........................6.4
1.09 Ethical behavior of firms........................................................17 .....n.................5.5 Sweden .................................6.8
1.10 Protection of minority shareholders’ interests ......................18 .....n.................4.9 Sweden .................................6.0

Legal and regulatory issues


1.11 Burden of government regulation .........................................47 .....n.................2.6 Singapore ..............................5.5
1.12 Centralization of economic policymaking ................................2 .....n.................5.4 Switzerland ............................5.6
1.13 Regulation of securities exchanges.......................................25 .....n.................4.8 South Africa...........................6.0
1.14 Property rights.......................................................................18 .....n.................5.4 Switzerland ............................6.4
1.15 Intellectual property protection .............................................19 .....n.................5.1 Sweden .................................6.2
1.16 Diversion of public funds.......................................................21 .....n.................5.1 Sweden .................................6.5
1.17 Public trust of politicians .......................................................26 .....n.................3.4 Singapore ..............................6.4
1.18 Corruption perceptions index ................................................17 .....n .................7.1 Denmark................................9.3
1.19 Strength of legal rights index ................................................19 .....n .................7.0 Multiple (3)...........................10.0
1.20 Central bank transparency.......................................................3 .....n................11.0 Sweden ...............................15.0 83
Contract enforcement
1.21 Effectiveness of law-making bodies ......................................35 .....n.................3.3 Singapore ..............................6.5
1.22 Judicial independence ...........................................................18 .....n.................5.2 Sweden .................................6.6
1.23 Irregular payments in judicial decisions.................................17 .....n.................5.9 Sweden .................................6.8
1.24 Time to enforce a contract ....................................................27 .....n.............505.0 Singapore...........................150.0
1.25 Number of procedures to enforce a contract .........................4 .....n...............25.0 Ireland..................................20.0
1.26 Strength of investor protection index....................................12 .....n .................7.0 Singapore ..............................9.3
1.27 Cost of enforcing contracts ...................................................14 .....n ...............16.6 Norway ..................................9.9

2nd pillar: Business environment


Human capital
2.01 Quality of management schools .............................................3 .....n.................6.0 Switzerland ............................6.1
2.02 Quality of math and science education...................................2 .....n.................6.2 Singapore ..............................6.5
2.03 Extent of staff training...........................................................14 .....n.................4.9 Sweden .................................5.7
2.04 Local availability of specialized research
and training services ...............................................................9 .....n.................5.8 Switzerland ............................6.5
2.05 Brain drain and ease of hiring foreign labor...........................17 .....n.................4.6 Switzerland ............................5.7
2.06 Tertiary enrollment.................................................................16 .....n...............62.5 Korea, Rep...........................94.7

Taxes
2.07 Irregular payments in tax collection ......................................22 .....n.................5.8 Sweden .................................6.8
2.08 Distortive effect of taxes and subsidies on competition.......25 .....n.................4.4 Singapore ..............................5.8
2.09 Marginal tax variation ..............................................................6 .....n .............–16.2 China..................................–24.6
2.10 Time to pay taxes ..................................................................18 .....n .............156.0 United Arab Emirates ..........12.0

Infrastructure
2.11 Quality of overall infrastructure .............................................15 .....n.................5.8 Switzerland ............................6.8
2.12 Quality of telephone infrastructure .......................................24 .....n.................6.5 Norway...................................7.0
2.13 Internet users .......................................................................16 .....n...............68.9 Sweden ................................87.8
2.14 Broadband Internet subscribers ............................................12 .....n...............28.0 Sweden................................41.2
2.15 Telephone lines......................................................................16 .....n...............42.1 Switzerland ..........................64.1
2.16 Mobile telephone subscribers...............................................26 .....n ..............111.6 Turkey ................................208.7

Cost of doing business


2.17 Cost of starting a business ...................................................24 .....n.................5.3 Denmark................................0.0

(Cont’d.)
2: Country/Economy Profiles

Belgium
Financial Development Index in detail (cont’d.) n Development Advantage n Development Disadvantage

INDICATOR RANK/57 SCORE BEST PERFORMER SCORE

2nd pillar: Business environment (cont’d.)


2.18 Cost of registering property ..................................................56 .....n ...............12.7 Saudi Arabia...........................0.0
2.19 Cost of closing a business ......................................................5 .....n.................4.0 Multiple (4).............................1.0
2.20 Time to start a business..........................................................3 .....n.................4.0 Australia.................................2.0
2.21 Time to register property ......................................................50 .....n...............79.0 Multiple (3) ............................2.0
2.22 Time to close a business ........................................................5 .....n.................0.9 Ireland....................................0.4

3rd pillar: Financial stability


Currency stability
3.01 Change in real effective exchange rate (REER) .....................16 .....n.................2.5 Venezuela ............................14.5
3.02 External vulnerability indicator..............................................n/a .........................n/a Saudi Arabia ...........................7.0
3.03 Current account balance to GDP...........................................30 .....n ...............–0.2 Kuwait ..................................37.1
3.04 Dollarization vulnerability indicator ..........................................1 .....n.................0.0 Multiple (23) ..........................0.0
3.05 External debt to GDP (developing economies) ....................n/a .........................n/a China .....................................9.4
3.06 Net international investment position to GDP
(advanced economies)..........................................................n/a .........................n/a Hong Kong SAR ................353.1

Banking system stability


3.07 Frequency of banking crises..................................................35 .....n.................2.0 Multiple (10)...........................0.0
3.08 Financial strengths indicator ..................................................10 .....n.................6.0 Multiple (4) ............................9.0
3.09 Aggregate measure of real estate bubbles ...........................12 .....n.................5.9 Ireland....................................6.8
3.10 Financial Stress Index ...........................................................35 .....n ...............10.7 Thailand ...............................–0.2
3.11 Tier 1 capital ratio ..................................................................13 .....n................11.8 Jordan..................................16.8
84 3.12 Output loss during banking crises.........................................35 .....n...............46.0 Multiple (21) ..........................0.0

Risk of sovereign debt crisis


3.13 Local currency sovereign rating.............................................15 .....n ...............19.0 Multiple (14) ........................20.0
3.14 Foreign currency sovereign rating .........................................15 .....n ...............19.0 Multiple (13) ........................20.0