- Institutional environment: encompasses financial sector liberalization, corporate governance, legal and regulatory issues, and contract enforcement.
- Business environment: considers human capital, taxes, infrastructure, and costs of doing business.
- Financial stability: captures the risk of currency crises, systemic banking crises, and sovereign debt crises.
- Banking financial services: measures size, efficiency, and financial disclosure.
- Non-banking financial services: includes IPO and M&A activity, insurance, and securitization.
- Financial markets: contains foreign exchange and derivative markets, and equity and bond market development.
- Financial access: evaluates commercial and retail access.
Access to Capital versus Financial Stability
As the global financial system moves from the finance crisis to the debt crisis, it’s tempting for leaders to focus all reform efforts on restoring stability to the system. However, as the overall index results show found in the report, access to capital may prove to be as—or even more—significant than financial stability in promoting economic growth. The need to make different forms of capital available will be crucial over the coming years for both advanced economies, to ensure their robust recovery, and for emerging economies, to continue to serve as the primary engine of global economic growth.
Furthermore, a large body of economic literature supports the premise that, in addition to many other important factors, the performance and long-run economic growth and welfare of a country are related to its degree of financial development. The higher the degree of financial development, the wider the availability of financial services that allow the diversification of risks. This increases the long-run growth trajectory of a country and ultimately improves the welfare and prosperity of producers and consumers with access to financial services. In general, we must remember that economic recoveries after financial crises have been shown to be much slower than those that occur after recessions not associated with financial crises.