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Does Financial Structure Matter for Poverty ? Evidence from Developing Countries

Does Financial Structure Matter for Poverty ? Evidence from Developing Countries . Roland Kangni Kpodar (IMF) & Raju Jan Singh (World Bank) World Bank Conference on Financial Structure and Economic Development, Washington, June 16, 2011. Objectives of this Paper.

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Does Financial Structure Matter for Poverty ? Evidence from Developing Countries

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  1. Does Financial Structure Matter for Poverty ?Evidence from Developing Countries Roland Kangni Kpodar (IMF) & Raju Jan Singh (World Bank) World Bank Conference on Financial Structure and Economic Development, Washington, June 16, 2011

  2. Objectives of this Paper • We look at the association between the structure of the financial system and poverty; • Focusing on developing countries; • Including institutional variables.

  3. Results • The structure of the financial system does play a role in reducing poverty; • Bank-based systems are associated with lower levels of poverty; • As institutions grow stronger, market-based systems could benefit the poor.

  4. Theoretical Background

  5. Why would finance matter? • Improves access to credit; • Allows risk diversification; • Creates jobs; • Reduces discrimination.

  6. Why would the financial structure matter? • Financial markets operate in an imperfect information setting; • Institutional arrangements play an important role : • Collect information • Define property rights • Enforce contracts

  7. A bank-based system could thus… • Provide wider access to credit; • Allow for cheaper risk diversification; • Create more jobs; • Reduce discrimination further.

  8. Empirical Analysis

  9. Data • Panel data from 47 developing economies • Observations averaged over five-year periods from 1984 to 2008 • IFS, WDI, Financial Structure Database, ICRG

  10. Variables • Dependant variable • Headcount Index • Control variables • GDP per capita • Inflation • Infrastructure • Trade openness • Variables of interest • Quality of institutions • Financial structure

  11. The Model where : • Pi,t – the indicator of poverty for a country i at a period t; • Yi,t– the level of income per capita; • Xi,t– a set of control variables • FSi,t – a set of variables accounting for financial structure • Law – the institutional variable: Rule of Law • ui- unobserved country-specific effect; εi,t- the error term Estimation Method: System GMM

  12. Results (without institutions)

  13. Results (with institutions)

  14. Figure 1. Poverty Headcount Ratio as a Function of Financial Structure and Institutional Quality

  15. Robustness Tests • Excluded outliers • Added additional control variables • Used alternative measures of absolute and relative poverty

  16. Thank You

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