Finance: Research, Policy and Anecdotes

I am on my way back from Barbados – not for an early spring break, but rather an IDB workshop on economic inclusion. It was my first time in this beautiful region in the world (but certainly won’t be the last time). Opening remarks by politicians are typically not the highlights of any workshop, but it was refreshing to listen to the Prime Minister of Barbados delivering competent and data-based remarks on the situation in her country, without the bluster or empty words that we have had to get used to in the US, UK and some European countries.

Not surprising, my presentation was focused on financial sector development and inclusion in the Caribbean – more specifically, on the six countries of the IDB Caribbean country department Bahamas, Barbados, Guyana, Jamaica, Suriname and Trinidad and Tobago.  It is quite a mixed group of high- and middle-income countries, two of which have off-shore financial systems and some of which have natural resource-based economies.  However, there are several common themes: One is the need of an efficient financial system to provide risk mitigation instruments due to natural disasters.  More than in other regions of the world and increasingly so in times of climate change, this function of the financial system is critical and might also explain why in many countries of this region the insurance sectors are relatively well developed.

Another common theme is that of the small size of all six economies and, hence, their financial systems.  Their banking systems are concentrated with few banks, thus reducing competition. Stock markets are large compared to the size and income level of the host economies, but exhibit a very low liquidity – a phenomenon that can be directly linked back to the small scale, as it is especially public capital markets that rely on network externalities. The small scale makes a focus on competition and contestability in the financial system even more important, which includes tapping the potential of non-bank players such as fintech.

The dominance of banking within the broader financial systems in the six countries also limits financing options for SMEs. As I have repeatedly argued, the segment of micro-, small and mid-sized enterprises is a very diverse one; and rather than focusing on the size criterion, the age of enterprises and the character of entrepreneurs as lifestyle or transformational entrepreneurs might be more important. This also implies a diversity of different financial products and players and looking beyond banks, which might not be best positioned to finance, e.g., start-up companies.  It also implies the need to look beyond the borders of each economy and draw on resources and expertise from the global financial system.

7. Feb, 2020