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This chapter provides a formal model for incorporating finance within the theory of the firm and for a more nuanced reading of the evolution of capitalistic economies. Financial markets emerged as mechanisms for ensuring the fulfilment of promises made for a return in the future in exchange for money today. The ensuing difficulties were met in part by legal changes, such as the development of limited liability and enforceable fraud standards, along with pragmatic advances in such areas of accountability as accountancy and auditing. Nonetheless, tensions remain due largely to information asymmetry problems and enforcement of difficulties. Given differing rates of return across sectors, the firm takes on the role of an important financial institution. An evolutionary process results in which deficiencies in the market give rise to new contract forms and their exploitation by some participants in the market, thus producing still newer arrangements. The evolution of financial instruments necessarily remains intertwined with the evolution of the firm.

Examines the role of the US in international financial institutions with particular reference to the World Bank and the International Monetary Fund (IMF). Describes the extraordinary influence of the US on these institutions as a function of both formal means (e.g., US financial contributions) and informal practices and conventions that have developed over time, with the informal mechanisms of influence often being more important than the formal ones. However, it is also argued that, notwithstanding the weight of US influence, it would be inaccurate to consider the World Bank and the IMF as mere instruments of US power and policy, and that their remaining credibility and legitimacy rest in part on their ability to create some political distance between themselves and their most powerful state patron. US domestic political conditions are also important. Within the country, the division of authority between Executive and Congress sometimes enhances and at other times constrains US influence; the effective exercise of US power also requires interlocutors in host governments who share the technical mind‐set and ideological predispositions of the US and international financial institutions. The different sections of the chapter: analyse the formal and informal structures of power in the World Bank and IMF; look at the US in relation to the financing, lending decisions, staffing and management of these institutions; and discuss formal power structures and informal exercises of influence.

This chapter assesses the evolution of international standard setting in financial markets by examining the characteristics of the various international bodies, such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, that are involved in international standard setting. Topics discussed include international financial institutions, supervisory structures for financial conglomerates, the Financial Action Task Force, and financial crises from the 1990s and onwards.

Woods's chapter focuses primarily on procedural justice within the international financial institutions. She argues that the procedures adopted by these institutions are central to the debate about global economic justice, and thus it is essential to explore how these bodies make decisions and implement them. Her conclusions suggest that, notwithstanding recent and important reforms, the institutions still suffer from weaknesses in representation and accountability. Unless these bodies attend to these deficiencies, the range and scope of their activities should be circumscribed.

This chapter argues that the adoption of international standards and principles of corporate governance should be accompanied by domestic regulations that prescribe specific rules and procedures for the governance of financial institutions that address national differences in political, economic, and legal systems. It begins by briefly considering “governance” within this context, using a principal-agent framework. It then discusses the general principles of corporate governance for financial institutions that the Basel Committee has adopted for all banking institutions operating in the G10 industrialized countries, followed by a discussion of the principles of corporate governance for securities firms as set forth by IOSCO. The overriding theme is the belief that transparency of information is integrally related to accountability in that transparency can provide government supervisors, bank owners, creditors, and other market participants with sufficient information and incentive to assess the management of a bank. The chapter concludes by considering these and other issues related to the governance role of financial institutions in the overall economy.

Especially in poorer countries and regions, international financial institutions (multilateral, bilateral, and increasingly international NGOs) have been important in financing the implementation of the pro-poor ideas, policies, and structures described in previous chapters. They have attempted to make their aid more effective – and since the 1990s more pro-poor – by attaching policy conditions to their aid, which is achieved through a combination of liberalization, good governance, and commitment to poverty reduction. This idea forms the basis of the Washington institutions’ Poverty Reduction Strategy documents. However, as this chapter shows, what really matters in practice is not adherence to formal conditionality but trust between international financial institutions and recipients; and this is determined more by personal relationships than by technical performance criteria. In spite of this personalization of the aid relationship, this chapter finds that aid does influence policy (for example, the level of the PPE and PPI indices developed in Chapters 5 and 6) and thereby, in the poorer countries, plays a significant part in reducing poverty. Indonesia, Ghana, Uganda, and Bolivia, and outside the study’s sample also Sri Lanka, Bangladesh, and India, would have had totally different poverty trajectories in the absence of support from the international financial institutions.

This chapter examines the politics of policy reform in low-income Africa, and specifically the double standard applied by the creditor countries in dealing with the debts of middle-income Latin American and low-income African countries. Whereas the Latin American debt was promptly dealt with by Western creditors because of the risk it posed to the stability of the Western banking system, equal attention was never given to the debt burden of the poorest African countries, whose debts were largely owed to multilateral financial institutions. Finally, the chapter examines the adequacy of the heavily indebted poor countries (HIPC) initiative, which was introduced in 1996 to address the problem of debt owed by low-income countries to the multilateral development banks.

Chapter 4 analyses the changes in the financial sector development along the dimensions of structure, size, reach, technology, efficiency, soundness of the sector. The structure of the sector has undergone substantial change in terms of new institutions and instruments, although most of them pertain to the private corporate sector. Reforms enabled the sector to grow along the dimensions of size, reach, and to enhance its productivity through the adoption of technological advancements. All the indicators show that the Indian financial sector, particularly banking sector has come a long way from fully regulated, less competitive, and high cost to more efficient and profitable industry. To make the sector more competitive in the international markets, lot more needs to be done.

This introductory chapter begins with a discussion of the proposed revision of the rules for the regulation of capital adequacy developed by the Basel Committee on Banking Supervision. It then describes the differences among financial institutions and the three ways to ensure adequate capital: market discipline, supervisory review of firm economic models used to determine capital, and command and control regulation. An overview of the chapters included in this volume is presented.

This chapter outlines the general purpose, scope, and structure of the book. It argues that the financial sector must share some of the responsibility to promote environmentally responsible development, and examines whether SRI has the ability to steer financial markets towards this goal. The shift from an ethical to a business case has made SRI more respectable, but robbed it of much of its capacity to promote a true alternative to current environmentally harmful investment practices. Improved governance of the SRI market therefore is essential, and this chapter outlines some priority areas for reform. In advancing reform, it is important to be aware of the complexity of the financial sector and its variable responses to environmental issues. There are significant differences in the institutional characteristics of financiers, which influence their capacity and willingness to invest responsibly.

This chapter takes a look at thrift among low-income populations today, analyzing institutions that support and discourage thrift among the poor. Personal savings itself is institutionally arranged to be easily available to the prosperous and relatively inaccessible to the low-income worker. The sale of lottery tickets and the high-interest lending of payday loan centers, on the other hand, are available at every corner store and strip mall. In this way, government and mainstream market forces are discouraging the practice of thrift among low-income populations (often, as in the case of credit card companies, in the name of “democratization”) more forcefully than ever before. The rising tide of this “debt culture” has been countered by the growing influence of Community Development Financial Institutions (CDFIs), which offer a range of services from savings accounts to mortgage lending to venture capital investing in low-income areas, and usually enjoy support from government funding and partnership with commercial financial organizations. They have popularized the notion of a “double bottom line” that measures investment success by both financial return and social impact. The overall impact of CDFIs, however, has been too small to counteract substantially the anti-thrift forces among the American poor.

This essay explores the development of financial regulation along two key dimensions: the preference for financial self-imposed standards over law-based prescriptions, and the preference for regulations based on the internal control mechanisms of financial institutions over traditional simple and easily verifiable rules. It begins by describing the conceptual road map used to examine controls in the financial industry then reviews the evolution of the methods of financial regulation. It discusses how to maintain effective control when financial institutions are given significant self-regulatory powers.

Chapter 1 begins with the overview of the financial sector policies—pre- and post-reform India. In the background of policy reforms, it presents the research issues and salient features of the study. This chapter states the basic research objectives of the study: assessment of the state of financial development and financial access in the post-reform period in India, and two extensions of these objectives, namely, international comparison of specified aspects of the Indian financial sector and the extent of private sector participation. The chapter notes the special features of the study, including macroeconomic growth approach and assessment of financial access in terms of availability and adequacy of financial resources from the formal financial system for the productive investment purpose at different levels of economy.

This chapter presents the large number of actors involved in post-conflict economic reconstruction and focuses on the key role played by the UN and the international financial institutions (IFIs). The chapter discusses the UN operational capacity, critically analyzes past reforms, and proposes institutional arrangements and expertise the UN lacks and which are essential to deal effectively with economic reconstruction. The chapter also discusses the policy advice and technical assistance provided by the Bretton Woods Institutions (the International Monetary Fund and the World Bank) to help post-conflict countries to set up their macro- and micro-economic framework and establish market-based policies and institutions. The chapter makes a critical evaluation of these institutions' role in financing reconstruction through their own institutional financial arrangements and through catalyzing financing from other donors. The chapter analyzes the relationship between the UN and the IFIs during reconstruction, as well as the cooperation and coordination among the UNDG.