1. Roland Kangni Kpodar (IMF) Raju Jan Singh (World Bank)
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 Control variables Variables of interest Dependant variable
Headcount Index
Control variables
GDP per capita
Inflation
Infrastructure
Trade openness
Variables of interest
Quality of institutions
Financial structure

11. The Model Estimation Method: System GMM
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)
Log of Poverty Headcount
(1)
(2)
(3)
(4)
GDP per capita (log)
-1.250
-1.222
-1.194
-1.207
[0.168]***
[0.126]***
[0.130]***
[0.144]***
Inflation (log)
-1.449
-1.358
-1.756
-1.677
[0.900]
[0.814]*
[0.817]**
[0.859]*
Inflation squared (log)
0.963
0.780
1.036
0.993
[0.556]*
[0.502]
[0.518]**
[0.524]*
Road/area
-0.008
-0.009
-0.006
[0.004]*
[0.004]***
[0.004]**
Trade openness
-0.002
-0.003
[0.004]
[0.003]**
Composite indicator of structure-size
0.381
[0.152]**
Composite indicator of structure-activity
-0.027
[0.056]
Composite indicator of structure-efficiency
0.086
[0.109]
Overall measure of financial structure
0.081
[0.102]
Constant
13.414
13.178
12.818
13.151
[1.389]***
[1.093]***
[1.066]***
[1.267]***
Observations
121
119
117
111
Number of countries 47 45 44 43
Sargan/Hansen test
0.43
0.59
0.51
0.47
AR2
0.07
0.18
0.21
0.16

13. Results (with institutions)
Log of Poverty Headcount
(5)
(6)
(7)
(8)
Composite indicator of structure-size
0.544
[0.216]**
Composite indicator of structure-activity
0.560
[0.335]*
Composite indicator of structure-efficiency
0.653
[0.218]***
Overall measure of financial structure
0.552
[0.296]*
Institutions - Law and order (ICRG)
-0.276
-0.270
-0.229
-0.236
[0.085]***
[0.093]***
[0.113]**
[0.104]**
Composite indicator of structure-size*Institutions
-0.110
[0.065]*
Composite indicator of structure-activity*Institutions
-0.151
[0.091]*
Composite indicator of structure-efficiency*Institutions
-0.159
[0.056]***
Overall measure of financial structure*Institutions
-0.136
[0.076]*

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