L. Colin Xu World Bank Conference on Financial Structure and Economic Development

1. Comments on: Does Financial Structure Matter for Poverty? Evidence from Developing Countriesby KangniKpodar and Raju Jan Singh L. Colin Xu World Bank Conference on Financial Structure and Economic Development June 16, 2011, Washington, D.C.

2. Gist and key contributions of the paper • literature on financial development and poverty/inequality, • but no study of financial structure (i.e., stock market/Banks). • This paper: financial structure  poverty in developing countries, 47 countries, 1984-2008. • Stock/banks (by size measure) positively related to poverty incidence. • Inst * stocks/banks negatively related to poverty incidence • When institutions are weak, stocks/banks have more pronounced effect on poverty incidence • or, banks more effective in reducing poverty than stock market. • When institutions are strong, stocks/banks increase poverty to a less extent.

3. Gist and key findings • Use system GMM method to identify the results, as in a large literature of cross-country growth regressions. • Key contribution: • Financial structure matters for poverty, new finding. • A plausible story: banks more than stock markets are better in reducing poverty in poor-institution environments.

4. Key questions to consider • The robustness of the relationship between financial structure and poverty incidence: • What about inequality, or average income for the poorest quintile? • What about average incomes for various quintile? • Why are banks better (than stock market) in reducing poverty? • What’s the theory behind the hypothesis? • We do not see evidence that banks work much on the poorest segment of an economy. • Useful to have such evidence. • Especially microfinance is not included in the banking development measures. • Should financial structure include microfinance? • Have such cross country indicators?

5. Empirically • Why drop rich countries? • Main variations in stock market likely come from rich countries. • How results would differ if rich countries are also included? • How do the effects of financial structure differ for developing and developed countries? • 5-year panel: • Still useful to see if the results hold with cross sectional estimates with collapsed mean sample. • More like long-term relationship. • Efficiency measures: • Can understand why size or activity measures of financial structure matter, • but why would the relative efficiency of banks versus stock markets matter for poverty reduction? • Is “stock market value traded/GDP” a measure of efficiency of stock market?

6. Empirically (2) • Useful to have a correlation matrix. • Suspect a close correlation between stock market and income level. • If too closely correlated, can we identify the effects of stock market? • Check: bank/stock * GDPPC, bank/stock * institution, the latter still significant? • Is there optimal mix of bank and stock market? If so, try nonlinear specification.

7. Empirically • To what extent the effects found are due to omitted variables? • Depth of financial development. • Nonlinear effects of log(GDP per capita). • System GMM widely used in growth literature. • weak IVs problem for both level and difference equations (Bun and Windmeijer 2007). • Useful if the results are robust with more intuitive IVs.

8. To summarize • A useful addition to the literature of the consequence of financial depth and structure. • Some suggestive evidence that banks and stock market differ in their ability to deliver poverty reduction. • Further checks on theory, endogeneity, and empirical robustness.