RETHINKING FINANCIAL DEEPENING
INTERNATIONAL MONETARY FUND 13
practical challenge was how to deal with missing data. The strategy adopted in this paper was to
balance the comprehensiveness of the FD index with an adequate coverage of countries and time
span, and, at the same time, avoid jumps in the index that are not related to actual changes in
financial development, but driven by the addition of new data series. Annex I outlines how this was
addressed.
6
A second challenge was that it was not possible to find sufficiently extensive country
and time period data on some institutions and activities. One example is shadow banks, whose
importance has been rising in a number of EMs, with associated risks (for a recent analysis on this
topic for a smaller country sample, see IMF 2014a). Finally, different forms of financial payments,
such as credit transfers, direct debits, and mobile banking, are undeniably relevant aspects of depth
and access in many countries, but indicators of these are currently not available for inclusion in the
FD index. Given these challenges and data limitations, IMF staff will continue to improve the index
over time as data coverage widens and more advanced aggregation methods develop.
7
B. Landscape of Financial Development in Emerging Markets
19. The evolution of the FD index over the sample period (1980–2013) shows a pattern
that confirms priors (Figure 4). Overall, financial development has progressed quite noticeably in
both AEs and EMs, and to a lesser extent in LIDCs. However, as one would expect, the gap between
the first two groups widened significantly between the mid-1990s and early 2000s, reflecting
particularly rapid growth in AEs’ financial systems. This episode marks the “Greenspan Era” in the
United States, a period when European cross-border banking expanded considerably, as did
investment banking and internet banking.
8
On the other hand, during this period financial
development proceeded more moderately in EMs and was relatively stagnant in LIDCs. The gap in
financial development between the AEs and EMs subsequently declined after the global financial
crisis, reflecting deleveraging in AEs.
20. A snapshot comparison across peer groups presents quite a diverse picture (Figure 5).
In particular, the “gap” in financial development between AEs and EMs differs across the various
dimensions of financial development highlighted in the figure. For example, EMs are closer to AEs
in financial institutions than in financial markets. Also, despite lower depth, the efficiency of EM and
LIDC financial institutions is relatively high. Finally, access is low, on average, across all income
groups, making this an area of potential improvement.
9
6
As explained in Annex I, missing values of some indicators in earlier years were “filled in backwards” by using the
growth rates of other available indicators. Nonetheless, for every subcomponent of FD, there is at least one indicator
with observations for the entire sample period.
7
Also due to data limitations, other potentially relevant features of financial development are not incorporated in
the index. These include the diversity of types of financial intermediaries, and the organizational complexity of
institutions as well as the complexity of instruments. The mix of debt vs. equity financing is included, as both types
were captured in the index, while some of the supporting empirical analysis tested whether the debt-equity mix, for
a given level of FD, altered the finance-growth relationship.
8
Figure 4 shows simple averages across countries, so the weight of the United States is relatively small. Also, direct
cross-border lending is not captured by the index, which focuses on domestic aspects of financial development.
9
Although all the indices are relative measures—each country observation of a given variable is measured relative to
the maximum level observed—the lower level of the average access subcomponent implies that there are a few
countries that achieve a high level of access, but most countries are farther from that level than they are from a
similar high standard for the two other dimensions of FD, namely depth and efficiency.