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FINANCE AND DEVELOPMENT RESEARCH PROJECT Methodology, Objectives and Research Themes
The first stage of the research programme is focused on the causal relationships between the financial sector and real sector development. It will also try to identify a core set of financial services that are necessary for poverty reducing growth and the institutional structures that have been more successful in providing them. Focus studies within each theme will clarify the key issues to be explored in country based research. The links between the financial sector, growth and poverty reduction will be explored:
Empirical studies in Sub Saharan Africa and South Asia will then be undertaken in collaboration with national research institutes in those countries.
RESEARCH OBJECTIVES AND APPROACH The purpose of the proposed programme of research is to identify effective financial sector policies in relation to the objective of promoting poverty-reducing economic growth in low income countries. We will seek to specify the forms of financial sector development and the institutional characteristics of the financial sector, and the financial sector policies needed to support financial stability and security, and pro-poor patterns of growth in economies categorised by low rates of saving and investment, shallow and undiversified formal sector financial systems, weak public administration, poorly developed private sectors, and low income levels. The intended outcome of the research programme is the provision of practical advice on financial sector policies and reforms relevant to the needs of policymakers in the low income economies of sub-Saharan Africa and South Asia. The research will provide policy advice on such issues as: strengthening the efficiency and regulation of the domestic financial sector; boosting domestic savings; enhancing the access of small and medium scale enterprises to credit; the provision of financial services to meet the needs of poor people. The main objective is to increase understanding of the crucial relationship between the parallel strategies of financial development and poverty reduction and thereby improve the effectiveness of policy design and implementation. The Approach Our approach to the research topic is premised on three propositions. The first is that a marked acceleration in economic growth rates is necessary for the achievement of a reduction in poverty, and that this, in turn, is dependent upon higher levels of savings and investment, in particular, private investment. A key function of the financial system is to facilitate increased savings mobilisation and to allocate the increased savings to those private investors capable of generating the highest returns to capital. The institutional features of the financial system are crucial for the efficient functioning of financial markets and their distributional impact. Our second premise is that the effectiveness of the financial system in stimulating overall savings and investment and the efficiency with which financial institutions allocate these resources across sectors, depend upon the regulatory regime for financial markets and institutions. Regulatory design, both internal incentive and governance structures and external monitoring and supervision, is a key instrument for financial development. The third premise is that an acceleration of economic growth through increased savings mobilisation, will not be sufficient to alleviate poverty in low income countries. Poverty reduction requires particular patterns of economic growth and institutional structures of which the main components are, firstly, rural development in general, and the enhancement of productivity and incomes in peasant agriculture in particular; and secondly, growth of labour intensive small and medium scale enterprises in rural and urban areas. It becomes necessary, therefore, to identify the particular types of financial services required to support rural development, the growth of SMEs, and the productivity and earnings capacity of the poor, including women farmers and enterpreneurs. These three propositions provide the foundations for the eleven research projects that will be undertaken by the programme. While the focus of each project will be different, all are intended to illuminate the underlying purpose of the research programme, namely to identify effective financial sector policies which will promote poverty-reducing growth in low-income countries. The projects will draw their fieldwork and evidence from the same set of case-study countries in sub-Saharan Africa and South Asia, which will allow the programme to produce both general results on the main research themes, based on cross-country comparisons, and studies of individual countries which integrate the research themes into a comprehensive analysis of the relationship between financial sector development and poverty reduction. Given that the research programme will cover a wide range of topics within the overall remit of financial sector development, various research methodologies will be employed. They will include: institutional analysis, ie the assessment of how institutional features of financial systems contribute to, or impede, financial sector objectives; comparative analysis of the experience of countries with different policies, institutions, etc; flow of funds analysis to identify key relationships between the financial and real sectors of the economy; rapid appraisal and participatory appraisal methods; quantitative analysis of company and financial institutions balance sheets; and quantitative and qualitative analysis of survey data. The focus and content of the research programme have been designed to complement and extend the current body of knowledge in the area of development finance. The specific projects and the countries to be studied have been determined by our assessment of where our existing knowledge of financial sector issues in low income countries is limited, and where, given the areas of expertise of the UK researchers and our collaborators in developing countries, we can most usefully direct our research efforts.
The Finance and Development Research Programme has eleven research projects which relate to three themes. Each theme is tied to the fundamental question for the research: What financial sector policies will help to promote poverty reducing growth in Low Income Countries? Under the Role of the Financial System in Development, the Universities of Loughborough, Manchester and Oxford will explore financial sector development and the real economy, corporate finance, savings mobilisation and international linkages and domestic financial development. Regulation Policy and Supervision of the Financial Sector (Manchester, Loughborough, Birmingham, Warwick) includes specific research on the reform and restructuring of financial institutions such as central banks, government owned banks and other development finance institutions. It also addresses the special problems of developing and regulating financial systems in countries recovering from war. Finance for the Poor (Manchester, Sheffield and Bath) explores financial services for the poor and poorest; the needs, institutions and policies for financing SMEs; sustainable financial institutions for rural poverty alleviation; and local level financial market operations. |
