Saturday, October 20, 2012

The World Bank’s “World Development Report 2013 - Jobs” makes me feel like an absolute failure.

The World Bank has recently launched their World Development Report 2013 titled “Jobs”. It is an impressive accumulation of interesting facts and analysis but, unfortunately, it lacks what for me is one of the most important issues in job creation…how banks can help out. 

What “WDR 2013-Jobs” has to say about the finance sector is limited to (page 294): 

"Across firms and countries at varying levels of development, the most important constraints on formal private sector businesses are remarkably consistent: access to finance, infrastructure, and aspects of regulation including taxation and unfair competition… 

Access to finance provides firms with the ability to expand, to invest in new technologies, or to smooth out cash flow over time. Financial markets also play an important role in the allocation of resources towards a more productive use. 

Transparency within the financial sector avoids resources being channeled to those with political connections or economic power, and it also supports financial inclusion.” 

And though all that is perfectly correct, it makes me feel like an absolute failure, because I have not, nor as an Executive Director (2002-2004), nor in the hundreds of hours of participating in different conferences, been able to make the World Bank understand that the current pillar of bank regulations, namely capital requirements for banks based on ex-ante perceived risk, does absolutely nothing to create jobs, much the contrary. 

I feel a bit tired to discuss the issue for the umpteenth time, so let it suffice to say that favoring so much bank lending to “The Infallible” and thereby discriminating so much against “The Risky”, like small businesses and entrepreneurs, cannot lead to an economy with sturdy job creation. 

A brief technical explanation: By allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, the regulators allowed banks to earn immensely higher risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”, and we all know that return on equity is, as it must be, the main driver for banks.

And, in this respect, if only as a mental exercise, once again I urge the World Bank to think on how ratings based on the potential for job creation, especially for the youth, would compare to those credit ratings currently used to determine the risk weights which determine the effective capital requirements.

And since “WDR 2013 – Jobs” also states: “The financial crisis of 2008 has reopened heated debates about the appropriate level of regulations of the financial sector and the need to balance prudence and stability with innovation and inclusion” let me again ask The World Bank. 

Is not all that has resulted from the current bank regulations, obese bank exposures to what was ex-ante perceived as absolutely not risky, and anorexic exposures to what was perceived as risky? 

And with respect to inclusion and equality, World Bank, again, favoring the access to bank credit of those already favored by markets and banks, “The infallible” and disfavoring those already disfavored by the markets and banks, “The Risky” is: 

Stupid, as The Risky have never ever caused a major bank crisis, only “The Infallible” have done that. 

Dangerous, as these regulations so completely distort the economic efficient resource allocation that banks are supposed to do. 

And immoral, because that is what regulatory discrimination, layered on top of markets’ and banks’ natural discrimination is. 

World Bank, if you really want to close the “gaps”, like you so often announce, why not start by closing the gap between “The Infallible” and “The Risky” generated by these regulations?

What in the genetics of the World Bank, the world’s premier development institution, makes it so hard for it to understand that risk is the oxygen of development?

Why can I not make the World Bank understand that when a nation begins to care more about what it’s got, “what is safe”, than about what it can get, “what is risky”, its economy will stall and fall?

Why can I not make the World Bank understand that when a nation begins to care more about the jobs it’s got, for the old, than about the jobs it can create, for the young, it will stall and fall.

Who on earth authorized bank regulators to call it quits on our behalf?

Why can’t I get through to those bright World Bank experts?

PS. I do appreciate some initial small efforts by the Word Bank to discuss the theme, but, of course, we need for it to be more outright discussing about what to do with those we are never ever going to find jobs for, before it is too late.