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Carole Biau
Director, Center for Financial Markets
Africa and Capital Markets and Emerging and Frontier Markets and Global Economy and Regional Economics
Carole Biau is a director at the Milken Institute Center for Financial Markets, where she launched and now leads the IFC-Milken Institute Capital Markets Training Program. Hosted at the George Washington University, this program offers an accredited certificate in capital markets development to mid-career policymakers from developing countries. So far, 39...
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IFC-MI Fellows Build the Link Between Global Financial Integration and Stable Growth

By: Carole Biau
April 27, 2017

As commodity prices and Chinese import demand continue to fall, and as U.S. interest rates pick up, are we headed for a “third wave” of the global financial crisis? Following the 2008 U.S. housing crash and the 2011-12 European sovereign debt crisis, many have warned that developing countries – particularly in Africa – are next. 

This raises two questions for policymakers across developing countries:

  1. What kind of preparation is needed to meaningfully manage a crisis if it occurs?
  2. And, more broadly, how can they strengthen the link between global financial integration and stable growth?

Several publications have stressed the importance of flexibility in policy responses to crisis. According to the Brookings Institution, lower-income countries share “rigidities” in their legal frameworks, overall business environment, and judicial efficiency that can considerably “hamper economic adjustment to shocks” if left unaddressed. In a similar vein, Liliana Rojas-Suarez, a Center for Global Development expert, compiles a “resilience indicator” out of critical macroeconomic factors affecting the ability of emerging-market authorities to respond to external shocks in a timely manner.

How do such findings apply to Africa more specifically? Two IFC-Milken Institute Fellows set out to answer this question last fall, as part of their capital-markets coursework at the George Washington University. Kenyan Central Banker Christopher Legilisho and Angolan Stock Exchange Director Walter Pacheco teamed up to apply Rojas-Suarez’s resilience indicator to a sub-set of African economies. Now a Milken Institute White Paper, the Fellows found that resilience to crisis worsened across their sample between 2007 and 2014: both affordability and availability of external finance, and policymakers’ ability to maneuver in terms of countercyclical fiscal and monetary policies, have declined. 

So, how can policymakers ensure that global financial integration works for growth and stability? Several econometric studies find the relationship between financial liberalization and economic growth in sub-Saharan Africa to be either unclear (Nikjam, 2017IMF, 2014), or even negative due to heightened risks of capital flight and financial fragility (Ahmed, 2013). But they also note that financial liberalization positively impacts financial deepening and domestic resource-mobilization under certain conditions: after controlling for institutional quality, fiscal imbalances, and human capital (Nikjam, 2017); when combined with reforms to improve educational attainment, macroeconomic stability, and overall governance (Ahmed, 2013); or for sub-sets of countries with stronger institutions and financial-sector supervision (IMF, 2014). 

We agree. Because human-capital constraints in developing countries can fracture the link between financial-market development and prosperity, the IFC-MI Capital Markets Program helps build policy-making capacity across regions with young capital markets, so that developing-country policymakers can pursue financial openness as a tool for growth and opportunity. Legilisho and Pacheco elaborate on this idea, proposing a positive agenda of sounder fiscal and monetary management, backed by robust institutions and reforms coordinated at the national and regional levels.

Other IFC-MI Fellows have made related policy proposals during the second portion of the Capital Markets Program in which they undertake hands-on work placements in the financial industry. In papers published today by their internship host WorldQuant LLC, Eden Mabilana proposes a course of action for addressing Mozambique’s liquidity conundrum; meanwhile Onkar Phadnavis explores the potential for Exchange Traded Funds to accelerate financial inclusion in countries where access to formal financial services and products remains elusive. In a note released today by IFC Thought Leadership, Abenet Bekele in turn analyses how commodity exchanges can disseminate market information and mitigate price risk while creating more robust agricultural supply chains in Ethiopia and other developing countries.

Eighteen trillion dollars in capital, international market players, regulators, academics, and policymakers will discuss such questions in Los Angeles on May 2nd, at the 20th Annual Milken Institute Global Conference. In our sessions on Building Tomorrow’s Agents of Change Across Africa and Stepping Into Globalized Financial Markets, we will explore the business case for engaging U.S. market participants in building a generation of informed and visionary policymakers across developing countries. 

There is no time to lose. Last year economic growth in sub-Saharan Africa dropped to its lowest level in over 20 years – with the first per-capita GDP contraction in 22 years (IMF, 2016). Stories of former high-growth performers hit by both plunging commodity revenues and political tensions (Nigeria, South Africa, Mozambique, etc.) are shaking the confident “Africa Rising” narratives of recent years (The Economist, 2011; Wall Street Journal, 2011). There is instead talk of “Africa Reeling” (The New York Times, 2016). And should a crisis occur, ripple effects will likely rapidly reach Europe and the U.S. Dialogue and mutual support across globalized financial markets can help ensure that future leaders –the IFC-MI Fellows among them – have the resources to enact smart policy when their countries need it most.