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
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.
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.

Theoretical Background
Why would finance matter?
Improves access to credit;
 Allows risk diversification;
 Creates jobs;
 Reduces discrimination.

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
A bank-based system could thus…
Provide wider access to credit;
 Allow for cheaper risk diversification;
 Create more jobs;
 Reduce discrimination further.

Empirical Analysis
Data
Panel data from 47 developing
economies
 Observations averaged over five-year
periods from 1984 to 2008
 IFS, WDI, Financial Structure Database,
ICRG

Variables

Dependant variable


Headcount Index
Control variables
GDP per capita
 Inflation
 Infrastructure
 Trade openness


Variables of interest
Quality of institutions
 Financial structure

The Model






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
Results (without institutions)
Log of Poverty Headcount
GDP per capita (log)
Inflation (log)
Inflation squared (log)
Road/area
Trade openness
Composite indicator of structure-size
(1)
(2)
(3)
(4)
-1.250
[0.168]***
-1.449
[0.900]
0.963
[0.556]*
-0.008
[0.004]*
-0.006
[0.004]
0.381
[0.152]**
-1.222
[0.126]***
-1.358
[0.814]*
0.780
[0.502]
-0.009
[0.004]***
-0.002
[0.004]
-1.194
[0.130]***
-1.756
[0.817]**
1.036
[0.518]**
-0.006
[0.004]*
-0.003
[0.004]
-1.207
[0.144]***
-1.677
[0.859]*
0.993
[0.524]*
-0.008
[0.004]**
-0.006
[0.003]**
Composite indicator of structure-activity
-0.027
[0.056]
Composite indicator of structure-efficiency
0.086
[0.109]
Overall measure of financial structure
Constant
Observations
Number of countries
Sargan/Hansen test
AR2
13.414
[1.389]***
13.178
[1.093]***
12.818
[1.066]***
0.081
[0.102]
13.151
[1.267]***
121
47
0.43
0.07
119
45
0.59
0.18
117
44
0.51
0.21
111
43
0.47
0.16
Results (with institutions)
Log of Poverty Headcount
Composite indicator of structure-size
Composite indicator of structure-activity
(5)
(6)
(7)
0.544
[0.216]**
0.560
[0.335]*
Composite indicator of structure-efficiency
0.653
[0.218]***
Overall measure of financial structure
Institutions - Law and order (ICRG)
Composite indicator of structure-size*Institutions
Composite indicator of structure-activity*Institutions
Composite indicator of structure-efficiency*Institutions
Overall measure of financial structure*Institutions
(8)
-0.276
-0.270
[0.085]*** [0.093]***
-0.110
[0.065]*
-0.151
[0.091]*
-0.229
[0.113]**
0.552
[0.296]*
-0.236
[0.104]**
-0.159
[0.056]***
-0.136
[0.076]*
Figure 1. Poverty Headcount Ratio as a Function of Financial
Structure and Institutional Quality
4.0
Poverty headcount ratio (log)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Robustness Tests
Excluded outliers
 Added additional control variables
 Used alternative measures of absolute
and relative poverty

Thank You