Niny Khor

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

Minimum Wages and Changing Wage Inequality in Indonesia

Wage inequality in Indonesia has decreased over the last two decades. This is in contrast to many developed and developing countries, which have largely seen an increase in wage inequality over this time period. This paper investigates the extent to which minimum wage laws may have contributed to the decrease in inequality over the distribution of wages by looking at changes in individual wages, hours of work, and employment between 1993 and 2007. Besides examining wage inequality in formal sector work we also examine changes in income inequality for the self-employed sector, which comprises a substantial portion of the working population in Indonesia. We find that minimum wages are a significant determinant of increases in monthly wages for the population below the minimum wage line in the formal sector, but not the informal sector. Adverse effects are observed in terms of increases in hours of work for individuals with wages near the minimum wage line. While there are no significant effects on overall employment, we find negative effects on formal sector employment for individuals throughout the wage distribution. The results suggest that minimum wage legislation has played a role in reducing wage inequality in Indonesia.

The Rise of the Middle Class in the People’s Republic of China

Using

The rise of middle class in rural China

2–

Evolution of Income Mobility in the People’s Republic of China: 1991-2002

20 (purchasing power parity) per capita daily income as the definition of middle class, majority of households in the People’s Republic of China (PRC) have become middle class by 2007, which is especially impressive given that around 40% of households were still considered poor in 1991. The rise of the middle class is evident for both urban and rural areas and across East, Central, and West PRC. The drivers of this trend include market development, industrialization, and privatization. As industrialization and urbanization continue in the PRC, the growth of the middle class will intensify, and could hold the key to altering the PRC’s growth pattern from investment- and export-led to consumption-led.

Inequality in China - Trends, Drivers and Policy Remedies

Purpose - Using official and household survey data, the purpose of this paper is to analyze the size of middle class in rural China, its trend and geographical distribution. Determinants or drivers of changes in the size of middle class are explored. Design/methodology/approach - An absolute definition of middle class, adjusted by rural purchasing power parity (PPP) and spatial price index, is employed to measure the size and geographic distribution of rural middle class in 1988, 1995, 2002, and 2007. Biprobit models and OLS models are estimated to investigate the determinants and consumption behavior of middle class in rural China. Findings - Major findings include: in 2007, as many as 398 million rural residents or almost 54 percent of Chinas rural population belonged to the middle class; the size estimate of Chinas rural middle class based on income is broadly consistent with that based on assets; factors enhancing the probability of a household entering the middle class include human capital, political capital and non-farming employment while industrialization, urbanization and development of TVEs also play significant roles; and the middle class not only consume more, but also consume more durables. Research limitations/implications - A limitation of the paper is the use of 2002 data. However, more recent data are not available. Originality/value - The size of the middle-class is crucial for the stability of China, and the growth of the middle class in rural China is crucial for rebalancing the Chinese and global economy. Thus, the measurement results, the identified drivers, and the consumption behavior of rural middle class revealed in this paper can help shed light on nurturing middle class and adjusting development strategy for China to achieve a more sustainable and balanced economic growth.

Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines

Annual income data may provide a misleading indicator of enduring income inequality in societies where there is considerable year-to-year income mobility. Using two rounds of data on households, the paper measures income mobility in the People’s Republic of China (PRC) between the early 1990s and early 2000s. In the early 1990s, the increase in income inequality in the PRC was accompanied by a level of income mobility comparable to other developing countries in transition, and was higher than that found in developed countries such as the United States. By the early 2000s, however, while the PRC’s income inequality increased further, income mobility decreased, implying that the probability of being stuck in a relatively lower level of income increased for households. The paper also finds divergent experiences of urban and rural households as the urban–rural gap widens. In the early 1990s, income mobility was higher among urban than rural households. Between the early 1990s and early 2000s, income mobility decreased for both urban and rural households, but the decrease was more pronounced for the former; therefore, in the early 2000s, urban and rural households had more or less the same level of income mobility. These findings are found to be robust to alternative ways of defining household income groups and analyzing income mobility.

Trade and employment in Asia

China has experienced rapid economic growth over the past two decades and is on the brink of eradicating poverty. However, income inequality increased sharply from the early 1980s and rendered China among the most unequal countries in the world. This trend has started to reverse as China has experienced a modest decline in inequality since 2008. This paper identifies various drivers behind these trends – including structural changes such as urbanization and aging and, more recently, policy initiatives to combat it. It finds that policies will need to play an important role in curbing inequality in the future, as projected structural trends will put further strain on equity considerations. In particular, fiscal policy reforms have the potential to enhance inclusiveness and equity, both on the tax and expenditure side.

Globalization and the Quality of Asian and Non-Asian Jobs

We examine the effects of a mandated credit program to small and medium enterprises in the Philippines (Magna Carta Law) using a panel dataset compiled from official data published by the Bangko Sentral ng Pilipinas. The final sample of 109 financial institutions represented over 90% of total finance sector assets in the Philippines. We highlight three important findings. First, although the total lending levels to micro, small, and medium enterprises (MSMEs) grew slightly, the percentage shares of loans allocated to MSMEs declined drastically from a peak of 30% of total loans in 2002 to 16.4% in 2010. Second, following the upwards revision of the loan target (from 6% to 8%) for smaller firms in 2008, there was a sharp increase in noncompliance especially amongst universal and commercial banks. Kernel density estimates suggest that the revision of the Magna Carta in 2008 was binding for small firm lending particularly for the universal and commercial banks. On the other hand, total loans to medium enterprises were still more than threefold larger than the targeted 2%. Third, there is an increased heterogeneity in optimal loan portfolio across banks. Most surprisingly, the absolute level of MSME lending by rural and cooperative banks declined since 2008. Direct compliance amongst universal and commercial banks decreased beginning in the late 2007, while that of thrift banks increased to almost 100%. Abolishing the Magna Carta targets for medium-sized enterprise loans would most likely yield little adverse effects. Meanwhile, efforts to improve financial access to MSMEs should focus on alternative nondistortionary ways to increase financing supply, such as improving institutional framework for informational availability and development of equity and bond markets for MSMEs.

Enterprises in the Philippines: Dynamism and Constraints to Employment Growth

1. Introduction, Niny Khor and Devashish Mitra Trade, Structural Changes, and Quality of Employment 2. Trade, Growth, and Structural Changes in Employment in Developing Asia, John Gilbert 3. Trade and the Quality of Employment, Robert Flanagan and Niny Khor 4. Competition, Labor Intensity and Specialization: Structural Changes in Post-crisis Asia, Yothin Jinjarak and Kanda Naknoi 5. Labor Market Institutions, Paul Vandenberg and Moritz Meyer Country Case Studies 6. Exports and Employment in the PRC, Cai Fang and Du Yang 7. Trade and Employment in Hong Kong: Towards a Service Economy, James Vere 8. Indonesia: Dynamics of Trade and Employment, Haryo Aswicahyono, Douglas H. Brooks, and Christopher Manning 9. Trade, Labor Market Institutions and the Pressure on Labor Markets: The Case of Korean Manufacturing, Devashish Mitra and Jeongeun Shin 10. Foreign Labor in Malaysian Manufacturing: Trends, Patterns and Implications for Domestic Wages, Premachandra Athukorala and Evelyn S. Devadason