An Economist Proposes that Government Involvement in Bank Activities: Finance & Development (Economics), Singapore

Assignment Details:

Q1. An economist proposes that government involvement in bank activities differs markedly across legal origins. Suppose countries around the world can be divided into groups by the origin of their commercial laws (including common law, French civil law, German civil law, Scandinavian law, and socialist law). Regressing government ownership of banks in 1995 (GB95) on legal origin dummies gives the following results. Which type of legal tradition has the highest government ownership of banks and which has the lowest? Why?

Q2. The figure below shows the distribution of the “soundness of banks” across countries in 2017. The variable measures the perceived soundness and stability of banks in countries using the following survey question in the Executive Opinion Survey of the World Economic Forum: “In your country, how do you assess the soundness of banks?” The responses range from 1 (extremely low – banks may require recapitalization) to 7 (extremely high – banks are generally healthy with sound balance sheets). Discuss how the values are distributed across the globe. What implications does this have for assessing the relevance of financial development for economic growth?

Q3. Family ties play a fundamental role in the development of human society. Several recent studies have highlighted that the strength of family ties (SFT) is related to various economic and social outcomes. In particular, Alesina and Giuliano (2010) find that SFT is associated with higher home production activity and larger family size, but lower levels of female labour force participation and geographical mobility. Alesina and Giuliano (2011) show that individuals that rely more on family tend to have lower levels of civic engagement and political participation. Alesina and Giuliano (2014) also propose that SFT is strongly correlated with lower GDP and lower quality of institutions. However, despite these findings, the association between SFT and financial outcomes has not been investigated in the literature and is consequently not well understood. An economics student has provided the following scatter plots that depict the relationship between SFT (average values from 1981-2014) and account ownership rate in 2014. However, he is unsure of how to provide an economic interpretation of the results. Can you suggest a conceptual framework which can be used for understanding how, in principle, SFT is related to financial inclusiveness?

[Notes: SFT is the first principal component of the following three variables constructed from the World Values Survey: (1) FAMILY (how important family is in a person’s life; (2) RESPECT (if one thinks that he/she must always love and respect parents; and (3) PARENT (whether one thinks that parents should do their best for their children even at the expense of their own well-being). A higher value indicates a stronger family tie.]