WASHINGTON, D.C., October 2, 1998 ---Development will not be sustainable without a strong local financial sector, according to a new International Finance Corporation book, Lessons of Experience 6: Financial Institutions, which argues that capital is made at home.
It is the countries with dynamic financial sectors that have built the strongest economies, Executive Vice President Jannik Lindbaek writes in his preface to the report. "Countries without them have felt the painful consequences. And countries that have started with weak, state-dominated financial sectors but then committed themselves to genuine reform have often reaped great benefits."
While foreign capital clearly plays a vital role, the report argues that countries grow primarily by productively investing their own domestic savings. That can happen over the long term if they have well-regulated private banks, securities markets, insurance companies, pension funds, and other financial institutions. This is a basic principle that applies to both developing and developed countries.
Inadequate regulation and the weakness of local financial institutions are key causes of the widespread economic fallout from the Asian crisis. The book stresses that Asia’s economic miracle never extended to finance and that problems in Asia’s financial sectors have now become evident: directed credit and administered interest rates; lack of international standards; reluctance to allow sufficient foreign competition; poor and nontransparent banking supervision; inadequate local debt markets; and an overall scarcity of equity. Nations such as Chile, Hungary, and Poland have overcome these problems and worked to bring their domestic financial sectors more in line with international standards and are in much healthier economic condition today.
IFC is both an adviser and an investor, often working with partners to launch the first privately owned institutions within member countries’ financial sectors. Financial sector approvals for its own account total more than $1 billion a year, including venture capital funds, bank privatizations, leasing companies, microcredit lenders, and debt and equity securities. IFC has cumulatively invested US$5.3 billion in more than 700 financial sector projects in 90 countries.
IFC, part of the World Bank Group, fosters economic growth in the developing world by financing private sector investments, mobilizing capital in the international financial markets, and providing technical assistance and advice to governments and businesses.
