The Institute’s research on development finance revolves around the Centre for Finance and Development (CFD), directed by Professor Jean-Louis Arcand and created with support from the Pictet Foundation for Development.
Development and finance are complex and multifaceted concepts. In economics, development usually refers to a process that improves humanity’s economic, political, and social well-being. Economists often look at the various statistical moments of the evolution of income per capita. They focus on average income per capita and its growth rate, but also on the variance and skewness of income per capita (which are measures of inequality) and on different ways to measure poverty. However, the idea of development is much more complex than the evolution and distribution of income per capita. In fact, economists and other social scientists often study how economic outcomes affect gender gaps, political participation, and many different types of social interactions.
Broadly speaking, finance is a field of economics that studies how various actors exchange assets and liabilities over time. The most basic financial contract is the debt contract, in which one agent delivers cash now against the promise of a future payment. Such intertemporal contracts are interesting for economists because they are more information intensive than spot transactions. The presence of asymmetric information and fixed costs associated with collecting and managing information is an important source of market failures. Understanding the workings of financial markets also requires
an interdisciplinary approach.
Intertemporal contracts can only exist in the presence of a proper institutional set-up and a well-functioning legal system that is able to enforce them promptly and at a low cost.
Jean-Louis Arcand, Lore Vandewalle, and Martina Viarengo are working on several projects that study how microtargeted financial interventions can improve the lives of the poor. For instance, Professor Arcand (together with Dr Malek Garbouj and Nestor Morgandi, a current PhD student) has been working on a project aimed at understanding how mobile banking can reduce the cost of remittances, while Professors Arcand and Viarengo are setting up a project aimed at evaluating the economic impact of a programme of financial literacy in a developing country. Professor Viarengo is also evaluating the economic and social impact of the activities of a large for-profit microfinance institution. Professor Vandewalle has been conducting fieldwork that focuses on the financial and social impacts of self-help groups (SHGs), the main institutional form of microfinance in India. Two important findings of this research agenda are that the SHGs have positive distributional implications and that collective actions by SHG members enhance the probability that gender-related issues become part of the political agenda.
Many governments have tried (or are trying) to address market failures with direct interventions by domestic public development banks. In some cases such banks have been effective in promoting economic and social development, in other cases they turned into an economic and fiscal disaster. One of my research projects tries to evaluate the role of national development banks and understand why we observe such different outcomes.
At the more aggregate level, Jean-Louis Arcand and I (together with Enrico Berkes, a former student) have showed that the positive growth impact of financial depth turns negative in countries with very large financial sectors. In another project, Yi Huang and I are trying to analyse the structure of local government finance in China. This project aims at understanding the relationship between the macro- and microstructure of local government debt markets and the political economy of local government borrowing in the aftermath of the global financial crisis. This is an exciting endeavour that capitalises on Professor Huang’s unique insight and his ability to uncover hard-to-find data.
Faculty members who work on the development aspects of international finance include Nicolas Berman, Yi Huang, Rahul Mukherjee, Cédric Tille and Charles Wyplosz. Professor Berman’s work focuses on the links between finance and international trade. He has published a series of important articles that study how financial conditions and their interaction with exchange rate variations affect export behaviour and the margins of trade. Professor Huang is conducting research on the international allocation of capital and trying to understand why certain countries suffer negative returns on their international investment position. Professor Mukherjee’s research provides important insights on the link between international finance and development by focusing on the behaviour of foreign direct investment during financial crises and by studying how corporate governance affects the international allocation of capital. Professors Tille and Wyplosz are world leaders in international finance research and contribute to the activities of the CFD with their research on financial crises and on the economic effects of financial globalisation.
Interdisciplinarity is a key characteristic of the Graduate Institute and Marc Flandreau’s research agenda in financial economic history is interdisciplinarity at its best. The MACROHIST project led by Professor Flandreau and hosted by the CFD aims at forming the next generation of scholars specialising in macroeconomic and financial history and capitalises on the Institute’s archive of historical financial data.
Ugo Panizza
Professor of International Economics,
Pictet Chair in Finance and Development