by Brian Hoyt
The World Economic Forum has released its Financial Development Report 2009, which scores and ranks 55 of the world’s leading financial systems and capital markets according to their level of financial development. It analyzes the drivers of financial system development and economic growth in developed and developing countries to serve as a tool for countries to benchmark themselves and establish priorities for reform.
The United Kingdom replaced the US as this year's top performer. America's fall is largely due to lower financial stability scores and a weakened banking sector (click to enlarge):
The report also highlights the impact of the financial crisis on the Millennium Development Goals. Erik Feyen, Financial Economist in the World Bank’s Financial and Private Sector Development Vice Presidency, has written a chapter in the report that highlights this impact.
Below is an excerpt:
Financial Development, Financial Crises, and the Millennium Development Goals
There is no doubt that financial sector development contributes to economic growth and poverty alleviation. And even though financial systems can be prone to instability, studies show that countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions because they stimulated healthy risk taking, by, for example, financing a small company, a farmer or R&D activities. However, financial crises can have devastating effects on the world’s most vulnerable people. The weakest members of society are often at the highest risk of falling into a poverty trap, which can lead to long-term developmental and economic losses. The current crisis has once again demonstrated that developing countries must strengthen their safety nets and plan their crisis intervention scenarios to protect the weakest in a timely, targeted, and cost-effective manner.
During normal times, both developed and developing countries with sound banking and capital markets enjoy stronger per capita income growth than countries without such markets. Research suggests that financial development results in fewer people living in poverty, since the poor indirectly benefit from economic growth through increases in employment opportunities, real wages, as well as from investment in core infrastructure.
However, although the poor benefit disproportionately from financial development, they also tend to suffer disproportionately from financial crises. This occurs because they are less able than wealthier people to insulate themselves against shocks. Even a small shock can force households to sell off productive assets such as land and livestock, economize on food and healthcare, and pull their children out of school to make ends meet. Thus, financial crises can endanger progress toward attaining the Millennium Development Goals.
Countries should continue to pursue policies that encourage financial development and avoid those that lead to excessive long-term intervention in systems or those that increase protectionism in the wake of a financial crisis. Well-thought-out safety nets and crisis policies would do much to mitigate the worst effects of a crisis on the poor.
Click here to view the report in full