Finance and Inclusive Growth in Low Income Countries: The Impact of Global Banking Regulation

Lead Research Organisation: University of Oxford
Department Name: Blavatnik School of Government

Abstract

In the wake of the global financial crisis, industrialized countries have agreed a series of regulatory reforms to repair and regulate their own financial systems. All countries, including LICs are encouraged to adopt these new global standards. Members of the G20 have asked the Financial Stability Board, IMF and World Bank to study how global banking initiatives will impact developing and emerging economies, identifying this area as a key policy concern for promoting inclusive growth. To date the scant research on this question addresses almost exclusively emerging market economies. LIC governments and advisers have voiced an urgent need for LIC-specific analysis.

This project will be amongst the very first to look at how political institutions and processes - at both the domestic and global levels - shape the impact of global banking initiatives on LICs and their ability to harness financial flows for inclusive growth. The core research questions are:
(1) How much de facto flexibility do LICs have in respect of the new regulatory standards, how much do they need, and under what conditions (economic and political; global, regional and national) should they adopt new regulatory standards?
(2) What strategies for influencing global standard-setting processes and institutions are likely to yield the best outcomes for LICs?

The project combines two disciplinary approaches: political science and economics. It combines quantitative and qualitative analysis, and will generate new datasets. Outputs will include top-quality peer-reviewed academic publications and a series of tailored policy briefs.

The project has been designed to maximize impact through continuous direct engagement with policy-makers confronting the problems the research addresses. The design of the research questions has been undertaken in dialogue with LIC and developing country policy-makers. We will continue to engage policy-makers through semi-structured interviews; annual workshops; and through the project's Expert Advisory Board. The Board includes Vivienne Apopo (Director General, East African Development Bank), Mthuli Ncube (Chief Economist, African Development Bank), Amar Bhattacharya (Director, G24 Secretariat).

Key beneficiaries are regulators, senior government officials, and other stakeholders in LICs engaged with promoting inclusive, sustainable growth. This includes the Community of African Banking Supervisors (CABS); the Banking Commission of the West African Economic and Monetary Union (WAEMU); the Regulatory Committee of the Central Bank of Angola; the National Financial Supervision Council (NFSC) of Vietnam; the Commercial Bank Supervision Department of the Bank of Laos; and the Central Banks of Tanzania and Uganda. Our impact strategy leverages existing close links between several of our researchers and key stakeholders in LICs.

The project will enhance the capacity of LIC governments to make choices about financial regulation, and to ensure global standard-setting processes support these choices. It will also enhance the capacity of scholars and stakeholders in LICs to continue the research in-country: to this end we are working with in-country researchers on the case studies and engaging Southern stakeholders with targeted dissemination. We will engage directly with academic institutions in LICs, such as the Department of Economics, University of Dar es Salaam (Tanzania); the Departments of Economics and Law, University Ouaga II (Burkina Faso); the Economics and Management Faculty of Lomé and Kara Universities (Togo); the Economics Department, Agostinho Neto University (Angola); the Fulbright School (Vietnam, a partnership between Harvard Kennedy School and University of Economics, Ho Chi Minh City).

The project will enjoy a ready exploitation route, building on the excellent track record and extensive network of the Global Economic Governance Programme (GEG) and the Blavatnik School of Government, University of Oxford.

Planned Impact

The project has been, and will continue to be, co-designed with beneficiaries in order to maximize impact at three levels: conceptual impact, through framing debates surrounding global banking initiatives and LICs; instrumental impact, through supporting the development of evidence-based policies for better financial regulation in LICs; and capacity-building impact, through engaging researchers and stakeholders in LICs throughout the process.

Well-functioning financial systems are fundamental to economic performance in LICs, and thus central to development and poverty alleviation. The members of the G20 have asked the FSB, IMF and World Bank to study how global banking initiatives will impact developing and emerging economies, identifying this area as a key policy concern for promoting inclusive growth (forewords to FSB 2012 and FSB, IMF & WB 2011 in the list of documents). Yet to date the scant research on this question addresses almost exclusively emerging market economies. This project will be amongst the very first to look specifically at how political institutions and processes - at both the domestic and global levels - shape the impact of global banking initiatives on LICs and their ability to harness financial flows for inclusive growth.

Beneficiaries of this project include a wide variety of stakeholders engaged with supporting inclusive growth in LICs, such as:

- Policymakers in LICs engaged in processes of financial regulation, including officials in central banks, finance ministries, and regional economic organisations. These include, amongst others, the newly-established Community of African Banking Supervisors (CABS); the Banking Commission of the West African Economic and Monetary Union (WAEMU); the Regional Securities Exchange (BRVM) of WAEMU; the Regulatory Committee of the Central Bank of Angola; the National Unit of Processing Financial Information (CENTIF) of Togo; the National Financial Supervision Council (NFSC) of Vietnam; the Commercial Bank Supervision Department of the Bank of Laos; and the Central Bank of Tanzania.
- Global financial regulatory-setting bodies and economic institutions, including the Basel Committee on Banking Supervision, the Financial Stability Board (FSB), the International Monetary Fund (IMF), the World Bank (WB) and the G20;
- Bilateral aid agencies seeking to support inclusive growth and fight poverty in LICs, including DFID; and
- Both Southern and Northern NGOs concerned with growth and development in LICs and specialized media working in this area.
Outcomes of this research will have local and global resonance. Locally, it will identify strategies for LIC officials designing and executing financial regulatory policies in-country, who will benefit from the increased understanding of both their local situation and the international comparative situation in their work developing effective evidence-based policy. Globally, it will provide valuable knowledge for international regulatory setting agencies and other international institutions on the impact of global banking standards on developing countries, and will support LICs in engaging in these global discussions. Furthermore, other stakeholders engaged in supporting inclusive growth in LICs - including bilateral aid agencies, NGOs and specialized media - will benefit from a richer understanding of the political economy of global banking initiatives in LICs, as this evidence base will allow them to more effectively carry out their projects.

Finally, the project will substantially contribute to capacity building through working directly with LIC-based researchers in the case studies and through engaging Southern research institutions, regional organisations, and government bodies. By building wide networks of both academic and non-academic stakeholders engaged with these issues - across both developed and developing countries - the project will ensure capacity building throughout its lifespan and beyond.
 
Description Working together intensively over three years, and working to a common analytical framework, our team has carefully and systematically analysed the ways in which regulators in developing countries are navigating the politics of contemporary banking regulation. We concentrate on low and lower-middle income countries, where existing scholarship is particularly scarce and focus on eleven jurisdictions across Africa, Asia, and Latin America: Angola, Bolivia, Ethiopia, Ghana, Kenya, Nigeria, Pakistan, Rwanda, Tanzania, the West African Economic and Monetary Union (WAEMU), and Vietnam. We have drawn on a wealth of empirical sources, including policy reports and interviews with more than 200 government officials, politicians, banking sector representatives, and experts. Our research shows how, even in the world's poorest developing countries, growing financial interdependence decisively shapes regulatory decisions, and in unexpected ways. Contrary to our initial expectations and much of the received scholarly wisdom we show how pressure from international organizations and global banks has relatively little purchase over regulatory decisions in many developing countries. Our analysis shows how an emerging set of actors in developing countries - internationally- oriented politicians, reformist technocrats, and large banks - drives the implementation of international banking standards. Our research highlights a paradox: international banking standards are not set with developing countries in mind, and the governments that set international banking standards are largely ambivalent as to whether countries in the periphery implement the standards. Although we would not expect regulators in many developing countries to adopt the standards under conditions of autarky, as they are far from optimal, we show how economic interdependence changes this calculus, providing powerful incentives for large domestic banks, politicians, and regulatory agencies to champion their implementation.
Exploitation Route This question will be answered at a later stage of the project.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice,Security and Diplomacy

URL http://www.geg.ox.ac.uk/research/flagship
 
Description Preliminary findings have been presented at the following conferences, engaging policymakers from developing countries and the international development community: • Paper: "Cross-border banking cooperation: From actual to optimal arrangements" presented at the XI Annual Seminar on Risk, Financial Stability and Banking of the Banco Central do Brasil in cooperation with the Bank of Finland, Fundação Getulio Vargas and the Journal of Financial Stability (Aug 2016). The same paper was also presented at the American Economic Association Convention, (Jan 2016), an internal seminar at the Reserve Bank of New Zealand in August and in an internal workshop at the Hong Kong office of the BIS in March 2016. • Outlines of the research project and preliminary results presented at African Central Bank Roundtable (Oxford, July 2016), UK African Studies Association (Cambridge, September 2016), Development Studies Association Conference (Oxford, September 2016), DEGRP/AERC Conference (Nairobi, Oct 2016), International Political Economy Society Conference (Durham, NC, Nov 2016), African Studies Association Conference (Washington DC, Dec 2016), Cambridge University Centre for Development Studies (Cambridge, February 2017), International Studies Association Annual Conference (Baltimore USA, February 2016)
First Year Of Impact 2016
Sector Financial Services, and Management Consultancy,Government, Democracy and Justice
Impact Types Policy & public services

 
Title Database on Basel II and III Adoption 
Description We have compiled a database on the adoption of specific components of Basel II and III by approx. 100 countries outside of the Basel Committee on Banking Standards from 2004-2015. This data was coded from the annual surveys conducted by the Financial Stability Institute. 
Type Of Material Database/Collection of data 
Year Produced 2016 
Provided To Others? Yes  
Impact This database was used to analyse factors driving the adoption of Basel II standards around the world, and was the basis for two journal articles (one published, one under review) listed in the publications section. The database has been shared with two sets of other researchers who have emailed us requesting it. We are developing a project website to disseminate our project findings and intend to make the database publicly available on that site. We will also present the data visually on that website. 
 
Description 1:1 meetings with International Organisations 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact A series of meetings were held with leading international organisations working on banking regulation. These included senior officials at the Consultative Group to Assist the Poor (CGAP) in Paris, France; at the Financial Stability Board (FSB) in Basel, Switzerland; and the Alliance for Financial Inclusion (AFI) via Skype. These organisations are all very interested in the project research and preliminary findings and have proposed further engagement. This includes attending the AFI annual meeting (Cambodia April 2017) to present the project findings to banking regulations from around the world.
Year(s) Of Engagement Activity 2017
 
Description Presentation at SOAS 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other audiences
Results and Impact The project research was presented at SOAS, University of London, in February 2018. While the event participants were primarily academics, a senior officials and researchers were present from the United Nations Economic Commission on Africa (UNECA) and the Overseas Development Institute (ODI). This presentation has led to requests for further engagement.
Year(s) Of Engagement Activity 2018
 
Description Presentation to African Central Bank Governors 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact The project research and headline findings were presented at a Roundtable of African Central Bank Governors in June 2016, and June 2017. The Central Bank Governors, Deputy Governors, and senior officials came from approx. 20 different African countries. This led to a request to present the work to African banking regulators, and we are exploring ways to do this.
Year(s) Of Engagement Activity 2016,2017