平和
和平
평화
ASIA
26 March 2014
Financial development in Asia

Financial development in Asia

A country's financial development is one key determinant of its economic growth. How do Asia's economies measure up in terms of financial development, and especially for access to financial services

A country's financial development is one key determinant of its economic performance. So how do Asia's economies measure up in terms of financial development, and especially for access to financial services, a key factor for fighting poverty?

Not surprisingly Asia's many and diverse economies measure up very differently in terms of financial development -- from Hong Kong which tops the World Economic Forum's (WEF) list of 62 economies, to China and India which rank 23rd and 40th respectively, down to Bangladesh, which is near the bottom of the list, at 57th.

There are many aspects of a country's financial development, as analyzed by the WEF. Factors like size, depth, access, and the efficiency and stability of a financial system, which includes its markets, intermediaries, range of assets, institutions, and regulations. (The WEF's detailed definition and the seven pillars of its Index are explained below.)

Why is financial development so important for economic performance and economic welfare?

First, financial development facilitates the mobilization of savings and its allocation to the highest-return investment projects. And then by allocating capital to the right investment projects and promoting sound corporate governance, financial development increases the rate of technological innovation and productivity growth.

Which countries lead the world in terms of financial development?

Hong Kong topped the WEF's 2012 survey of 62 countries, followed by the US, the UK and Singapore. Japan was further down the list at 6th, with Korea at 15th, Malaysia 18th, China 23rd, Thailand 34th, India 40th, Philippines 49th, Indonesia 50th, Vietnam 52nd, and Bangladesh 57th.

With Asia being the region with the largest number of the world's poor people, we are also particularly interested in "financial access", an important factor for poverty reduction.

Access to financial markets for consumers and producers can reduce poverty, by providing the poor with access to banking services and credit. Microfinance can make play a very important role in that regard. Consumer credit can enable smoothing of consumption over time as borrowing and/or lending can soften the effect of temporary ups-and-downs and shocks to wages and income.

By enabling diversification of savings and of portfolio choices, microfinance can also increase the returns on savings. Insurance services can mitigate a variety of risks that individuals and firms face, and allow better sharing of individual or even macroeconomic risk.

Which countries provide businesses and consumers with the best access to financial services?

Sweden tops the 62 countries surveyed for financial access, followed by Canada and Belgium. Overall, Asia scores much less well for financial access, with Hong Kong ranking 4th, Singapore 14th, Korea 22nd, Japan 27th, Malaysia 28th, China 41st, Vietnam 43rd, India 45th, Bangladesh 51st, Philippines 53rd and Indonesia 54th.

All things considered, Asia is lagging in its frinancial development, and especially in its access to financial services for its citizens. This is just one aspect of Asia's widespread oligarchic societies, which favor big business and societal elites, to the detriment of citizens, especially those living in poverty. It is also one of the reasons why the gap between rich and poor continues to widen in Asia.

Asian country profiles

Hong Kong, 1st place

Hong Kong scores quite high for its business environment, with taxes and infrastructure being strong points. It showed weakness in the aggregate macroeconomic indicator, as well as in the manageability of its public debt. With regards to financial intermediation, Hong Kong benefits from both a large and efficient banking system. While commercial access to capital remains very strong, retail access is a clear area for improvement.

Singapore, 4th

Singapore showed improvement in the financial stability pillar. Its stable currency system is driven by strong results in the current account balance, and net international investment position to GDP. Although Singapore has exhibited strong results in banking financial services, the country does show weakness in financial information disclosure. The country has highly developed foreign exchange, derivatives, and equity markets, but lacks a well-developed bond market. Financial access scores are mixed, with Singapore scoring high in terms of commercial access to capital, but quite low with regards to retail access.

Japan, 7th

Japan scores well for banking financial services, non-banking financial services, and financial markets. While its banking system is both large and efficient, the country lags in terms of financial information disclosure. The country’s business environment is also relatively weak by developed country standards. It suffers from a weak human capital pool, a less-than-optimal tax regime, and a high cost of doing business. Financial access continues to be a weak point for Japan. Commercial access scores fell sharply because of declines in the ease of access to credit, financing through local equity market, and foreign direct investment to GDP.

Korea, 15th

Korea continues to show improvement, as it benefitted from positive developments in financial access. Although it ranks quite low in commercial access, the country does have a development advantage in retail access. Korea shows signs of weakness for institutional environment and financial stability.

Malaysia, 18th

Malaysia suffered from a decline in its financial stability indicators, due to increasing currency and banking system instability, and also a deterioration in financial access because of weakness in retail access. Malaysia does benefit from a high degree of financial information disclosure, robust IPO activity, and a well-developed bond market.

China, 23rd.

China's ranking dropped due, in part, to greater banking system instability and weak results in both commercial and retail access. Nevertheless, China scores particularly high in non-banking financial services, with IPO and M&A activity being especially robust. Still, there is considerable room to improve China’s business environment, which remains the country’s worst-performing pillar.

Thailand, 34th.

Thailand performed well this year thanks to strong results in equity market development, and retail access. Thailand’s banking system also increased in both size and efficiency. There are however concerns about Thailand's financial stability, driven by an increase in the risk of sovereign debt crisis and banking system instability.

India, 40th.

India' rank fell four spots this year with weak results in its institutional and business environment, driven by an inability to enforce contracts, a low degree of financial sector liberalization, inadequate infrastructure, and a high cost of doing business. For financial access, India has a development advantage for commercial access, but an important development disadvantage for retail access.

Philippines, 49th

The Philippines was unable to continue its impressive climb up the rankings, falling five spots this year. The biggest change occurred in banking financial services. Nevertheless, positive developments can be seen in the country’s institutional and business environment, for example for corporate governance, legal and regulatory issues, human capital, and taxes. Financial access, particularly retail access, remains an area for improvement.

Indonesia, Vietnam, and Bangladesh

These three countries are all placed near the bottom of the Financial Development Index. All three countries continue to score quite low in the institutional and business environment pillars. All three countries experienced rank declines in the financial access pillar, with Vietnam and Bangladesh dropping the most.

Definition of financial development

Financial development is defined by the WEF as the factors, policies, and institutions that lead to effective financial intermediation and markets, as well as deep and broad access to capital and financial services.

The WEF measures of financial development through an Index with seven pillars:

(i) institutional environment: encompasses financial sector liberalization, corporate governance, legal and regulatory issues, and contract enforcement;

(ii) business environment: considers human capital, taxes, infrastructure, and costs of doing business;

(iii) financial stability: captures the risk of currency crises, systemic banking crises, and sovereign debt crises;

(iv) banking financial services: measures size, efficiency, and financial information disclosure;

(v) non-banking financial services: includes IPO and M&A activity, insurance, and securitization;

(vi) financial markets: encompasses foreign exchange and derivatives markets, and equity and bond market development;

(vii) financial access: evaluates commercial and retail access.

Author

John West
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
Tags: asia, financial development, financial access, microfinance, financial stability

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