Finance and Globalization Summary

Synthesized by Tania El Kallab

Five interdisciplinary papers converged in exploring differently three relevant ideas:

a) Imperfect markets may lead to social frictions in behaviour

b) Institutions and regulations may not correct perfectly for that

c) Implementation and enforcement mechanisms of those regulations, adapted to local contexts and social characteristics may matter more

Taking the different disciplines that tackled the issue as an example, one paper found that the relatively young micro-credit companies (MCC) require more transparency and hence are still constrained to accessing the debt market. A complementary study found that whenever gender marks in language are higher in a certain country, for-profit MCC are more likely to target women since the latters are less likely to default. However women in general are still less fortunate in accessing the debt market.

Going to the financial market, another paper shows that dislocations from fair value in index futures are driven mainly by market sentiment, hedging costs and limitations in arbitrage that drive down the confidence in the system. A similar paper studies empirically the causal relation between the financial market and the economic growth rates which is mainly driven by a reduction in transaction costs, information asymmetries and low liquidity risks which are all sort of regulations that try to reduce markets’ lack of transparency.

The banking sector is a quite intuitive example of how weak enforcement of regulations would lead to overexploitation of the resources leading to what the presenter called “the tragedy of the commons”, where too much confidence in the system would damage it.

The main insights of the above five papers is that asymmetric information and lack of transparency may create transaction costs and confidence issues that shape the “ players’ ” behaviours in financial market, banking sector and Micro credit organizations. One can no longer rely on this “invisible hand” guiding the market to its efficient level of production and consumption” (Adam Smith, Wealth of nations, 1776).

Hence, the presence of regulations is necessary, though insufficient for controlling and limiting those distortions since rule circumvention is a common loophole in any system. One should look closely at:

1. The source/ origins of those regulations (characteristics of the resources)

2. Under what framework they are enforced (socio economic environment)

3. The reliability of the institutions behind them (property right regimes, rating agencies)

Hence a more efficient way to reduce the moral hazard problem and maximize social welfare through socially responsible governance is through frequent interaction and communication on how those rules and regulations are enforced based on local context and local constraint affecting the implication of those rules.