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Time for the South to step up and help finance development?
Riding a Wave Thomas Helbling, Valerie Mercer-Blackman, and Kevin Cheng Consumers and commodity importers have begun to feel the pinch from higher commodity prices, with widespread concern about the impact on the poor in emerging and developing economies. The current commodity price boom may have a lasting impact. If policies are well designed, their economic costs should be manageable. Cline If steps are not taken to curb carbon emissions, agricultural productivity could fall dramatically, especially in developing countries.
It is therefore strongly in these countries' own interest that they participate actively in international emissions abatement programs. The role of fiscal instruments is central—indeed, indispensable—for both mitigating and adapting to climate change. The Greening of Markets Paul Mills Recognizing how financial markets will react to climate change initiatives, and how they can best promote mitigation and adaptation, will become crucial to shaping future policy and minimizing its costs.
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Rising Temperatures, Rising Risks Mohan Munasinghe Although climate change and sustainable development are complex, interlinked problems that pose a challenge to humanity, they could be solved together by integrating adaptation and mitigation response measures into the broader rubric of sustainable development strategies. Coe Outsourcing of service jobs to other countries could affect industrial countries' economies and attitudes toward globalization.
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The ongoing integration of China and India into the world economy is likely to have lasting effects on the distribution of income and on job security in advanced economies. The first caveat, however, is that beneath the aggregate figures lies considerable variability across countries within the region. For example, in private sector credit amounted to 78 percent of GDP in Jordan, almost eight times the level observed in Libya. Similarly, stock market turnover in Saudi Arabia, at percent, was about 11 times that of Lebanon.
The second qualification is that, while the capacity of MENA economies to generate deposits has been quite substantial, the intermediation of those funds by banks into private sector credit has not been as impressive. MENA banking systems are more likely to send funds abroad or invest in domestic securities—government bonds, for example—than increase credit one-for-one with additional deposits received. By expanding on these underlying issues and comparing financial depth, not only with that of other regions, but also in relation to structural characteristics of the economy, we can draw more meaningful conclusions.
Simply put, the benchmark indicates the degree of depth that would be expected from a country with given structural characteristics. This comparison reinforces our earlier discussion. As of —the most recent year for which structural benchmarks have been estimated—MENA countries had an average credit-to-GDP ratio of 48 percent and a stock market turnover ratio of 45 percent, both about 10 percentage points above the average for emerging market and developing economies as a whole see Chart 4. For the world as a whole, the average level of a given indicator should be equal to the level predicted by the average structural characteristics.
However, this does not necessarily hold for individual countries or regions, which may under- or outperform their benchmarks. Although banking systems in emerging market and developing economies, on average, had roughly the amount of private sector credit that would be expected from their structural characteristics—actual ratios of credit to GDP and credit to deposits being roughly equal to the respective benchmarks—MENA banking systems underperformed.
The underperformance was most notable in the non-GCC countries and with respect to the credit-deposit ratio, which indicates the inability to convert deposit funds into private sector loans. This is partly due to heavy public sector borrowing, particularly in certain non-GCC countries. For example, in Algeria, banks lend almost 50 percent more to the government than to the private sector, in Syria over 20 percent more, and in Egypt roughly the same amount as to the private sector.
Regarding stock market activity, turnover appears at first glance to be relatively robust in the MENA region, yet the high level observed in the GCC countries reaches only about half its structural benchmark. Despite the important strides made by MENA countries to reform their business environments and deepen their financial markets, the region still ranks lower than any region except sub-Saharan Africa in access to both deposits and bank loans.
Moreover, available credit tends to be heavily concentrated, favoring a few large and well-established firms, while smaller and young businesses—those that create the majority of jobs—are left to rely on limited internal finance or informal channels to secure much-needed funds. Furthermore, MENA countries fall short on access to credit not only relative to other regions but also relative to the depth of credit.
Previous IMF research found that a given level of banking depth in MENA countries is less effective than in other regions when it comes to generating economic growth over the long term—an indication of a quality gap in MENA banking systems. Although it is difficult to ascertain exactly why the same amount of bank credit in MENA countries pays a weaker growth dividend than in other regions, it is quite plausible that limited access to credit and to financial services in general is a key piece of the puzzle, and may in part explain the persistent underperformance of MENA countries in economic growth.
The MENA region is at a historic juncture. Beyond the challenges of political transition, the economic objectives are quite clear: raise the rate of economic growth, create more jobs, and ensure that economic growth is more inclusive. It is also clear that financial stability alone is not enough for the region to enjoy the benefits of economic growth and that there is a dire need for inclusive financial deepening.
Achieving this objective depends on a comprehensive agenda covering sound economic policies as well as far-reaching structural and institutional reforms. A successful reform agenda for the coming years will necessarily be a balancing act. Increasing depth—in countries that are still lagging—and enhancing access to the existing depth will require a combination of market-friendly policies that remove distortions, such as barriers to entry, interest and credit controls, and direct state ownership of banks, as well as substantial pressure to finance the government.
In addition, broader policies aimed at improving the environment for financial intermediation should be pursued: macroeconomic stability must be maintained, legal protection of creditor and small shareholder rights must be strengthened, and credit information and collateral regimes must be enhanced. Naturally, as credit increases in size and breadth throughout these economies, and the borrower pool expands beyond the traditional large and well-connected firms, credit risk is likely to rise.
Policymakers should ensure that market-harnessing policies, both at the micro- and macroprudential levels, are up to the task, so that the gains achieved by greater finance are not undone by excessive instability. Letters may be edited.
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