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The Faces Of Convergence E-Book

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The Faces Of Convergence E-Book

“The Faces of Convergence” is a collection of 34 short essays

The Faces of Convergence e-book is a collection of 34 short essays by people who made major contributions to the process of convergence in the countries that joined the EU in the three waves of eastern enlargement. Contributors come from business, government, banking, research, higher education, and civil society. They share views on the impact of the EU on the convergence process.

The 2004 EU expansion must be viewed as part of a broader process of convergence of the Central and Eastern European countries toward Western Europe. We should start at least from 1989, with the fall of the Berlin wall, a symbol of the collapse of the communist regime. As the Iron Curtain fell, most former communist countries chose membership of the EU as their ultimate goal.

Geographical proximity was an important, but not the only, contributing factor. Most countries wanted to join the EU for its high standards of living, political democracy and more generally a „human“ way of living. Compared to the rest of the world, the EU has the highest quality of life. Therefore, joining the EU has been a bright beacon, helping navigation along the paths of post-communist reforms for many. With the Global Financial Crisis, the light from this beacon was dimmed. It was almost extinguished during the Sovereign debt crisis in Europe. But, by 2014, this crisis had mostly come to an end and the EU still had its 13 newest members. The process of integration is not, however, yet complete, as not all of these members have joined the Eurozone.

For some new EU members the Euro-crisis affected the „attractiveness“ of this later step of joining the Euro. But as European financial system has been considerably reformed since then, with new institutions, new mechanisms and a broader range of monetary policy instruments applied by the ECB, one should expect enlargement of the Eurozone to continue.

Global Banking Regulation: Q&A

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Global Banking Regulation: Q&A

Introducing FinConf 2019’s

FinConf 2019 is an extremely useful event. In general, there is a lot of misunderstanding about technology. Bringing together such an impressive list of experts will give clarity to participants, the public and policy makers to see the main trends in innovation and prepare for the near future.

Q:
Which trends do you see in global banking regulations?

A:
In my view, the main trend is minimizing risks taxpayers will face in future financial crisie. Regulation to a large degree has still been reactive to the 2008 global financial crisis. Regulators around the world both on a global level, like the Bank for International Settlement, and national regulators are preventing taxpayers from bearing the costs future banking crises.
On top of this, there are more general trends about regulating new technologies and enabling commercial banks to prioritize long-term development over short-term profits.

Microeconomics Of Technical Assistance

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Microeconomics Of Technical Assistance

A personal and unorthodox approach

Technical assistance is typically in the business of on-the-ground capacity development, which is defined as:”… the process of strengthening the abilities of individuals, organizations and societies to make effective use of the resources, in order to achieve their own goals on a sustainable basis.”

Introduction

Ever since I started working in the area of Technical Assistance (TA) I have sometimes felt like a salesperson knocking on door to door and offering gadgets that no one actually wants. I have always wondered about that. Considering that TA is usually free of charge for the authorities and that it is supposed to be “demand driven”, the problem should lie in its insufficient supply, rather than in the lack of demand for it. There are different definitions of TA. Here is the definition by the UNESCO, which can also be applied to the economic area: “Technical assistance is non-financial assistance provided by local or international specialists. It can take the form of sharing information and expertise, instruction, skills training, transmission of working knowledge, and consulting services and may also involve the transfer of technical data. The aim of technical assistance is to maximize the quality of project implementation and impact by supporting administration, management, policy development, capacity building, etc. The technical assistance focuses on particular needs and priorities identified by the beneficiary country …”
Technical assistance is typically in the business of on-the-ground capacity development, which is defined as:”… the process of strengthening the abilities of individuals, organizations and societies to make effective use of the resources, in order to achieve their own goals on a sustainable basis.”

Admittedly, my overall experience with providing TA in different countries (mostly in Europe and Africa) has been extremely positive and rewarding, but in a few cases and countries (which I will not name) I felt redundant. This text is about such experiences. It is not supposed to be a thorough evaluation of TA, but rather a personal account. You may call it a case study of some negative experiences, which also makes an effort to suggest some improvements in TA efficiency. I have no doubts about the usefulness of TA or capacity development in general. What I would like to do is nudge TA donors, providers and recipients (i.e. all stakeholders) to think outside the box about how to make this important function more effective.

Hey Siri, I Need A Loan

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Hey Siri, I Need A Loan

The Role of Central Banks in Financial Literacy

Alexa is Amazon’s intelligent voice assistant, which is developing very rapidly. A company like Amazon might combine all the required transactions: finance the purchase of a new car (optimizing the loan according to my income and assets) and deliver it without me leaving my home.

Me: “Hey Siri, I need a loan.”

My iPhone: “How does XXX (the actual name of a bank) sound like? I can give you directions,” replies Siri and a map pops up on my screen with directions how to get to the bank. This is the actual conversation I had with my iPhone when writing this text. For those unfamiliar with it, Siri is a voice-controlled, intelligent virtual assistant created by Apple.

However, with artificial intelligence (AI) developing exponentially this conversation might soon look something like this:

Me: “Hi Alexa, I need a new car. Which loan is best for me?”
Alexa: “Do not worry about a loan, I will find optimal financing for your car. Just pick the model you like and we will deliver it to your door tomorrow”.

Alexa is Amazon’s intelligent voice assistant, which is developing very rapidly. A company like Amazon might combine all the required transactions: finance the purchase of a new car (optimizing the loan according to my income and assets) and deliver it without me leaving my home. Without even applying for a loan at a bank or going to a car dealer to get a car. I could have this conversation with Alexa (and buy a new car) while sipping coffee in my kitchen as Alexa will be integrated in my refrigerator.

So the question is whether we need to increase financial literacy when machines (AI) will soon be helping us make the best financial decisions for ourselves? My answer is yes, we do need to focus on financial literacy in spite of all the technological advances in finance, and in this note I will try to explain why.

Can Monetary Policy Alone Guarantee Prosperity?

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Can Monetary Policy Alone Guarantee Prosperity?

There is no substitute for hard work

Based on experience in largest advanced economies, many have suggested that emerging economies should „print money“ to grow out of the stagnation/crisis. Life would be easy if this was the right answer. So, before doing so, I would strongly urge emerging central banks to consider the three lessons below:

1. „There is no substitute for hard work“. T.A. Edison. When I was working in the region (Bosnia in particular) there was a lot of discussion on the exchange rate regime and competitiveness. Like what is the “exit policy” for a currency board or fx risk in the region (in relation to foreign exchange lending at the time)? In most cases the answer was: We need to enter the EU and EMU as soon as possible. Once we have the euro (officially, not unilaterally like Montenegro and Kosovo today) our problems will be “over”. Greece, Portugal and some other Euro economies has taught us an important lesson: there is no substitute for structural reforms, sound macroeconomic policies and competitive companies capable of exporting to globalized markets. When the euro was introduced some claimed that by definition there is only “one inflation in the eurozone” or that the balance of payments (more specifically, current account deficits) does not make sense in the eurozone (only on an aggregate level) because the state of Montana in the US does not have a BoP either, etc. Today we know better. What is clear is that the euro is not a substitute for sound economic policies. I would even argue provocatively that entering the euro zone prematurely can aggravate the problems for a country. The euro created an illusion that there was no “exchange rate risk”, creditors were willing to lend much more and at lower rates due to the euro. But the main economic lessons still apply.

2. For my second lesson I would like to paraphrase a famous saying from Bill Clinton’s 1992 presidential campaign: It’s the politics, stupid. Politics is much more important in economic policy making than I had anticipated. And until we economists start addressing it explicitly when discussing measures and actions, I doubt we will ever end up with successful economic reforms. Let me explain: Good economics should lead to an increase in welfare for the society (otherwise it would not make sense). But we all know that people do not like change (the tyranny of the status quo), have very high discount rates (i.e. want it all now), will fight hard for their acquired “rights” and benefits etc. Every measure of economic policy redistributes income (if it does not, it is useless). So, someone will always be against any measure. And in democratic societies the only real power comes from elections. Even central bank governors with all their independence are elected by parliaments, i.e. political institutions par excellence, and are ultimately accountable to voters. Of course, some professional skills are necessary, no doubt. But, for tough reforms of your economies you need to build support for them. Again, in democratic societies power comes from elections. So, ultimately you need a mandate for tough reforms. And you can implement reforms only by explaining this regularly. So, the lesson that I have drawn from this is that while a necessary precondition for good policy making is, of course, “technical excellence”, to implement it you need political support. I am arguing that there are a lot of information asymmetries regarding what I would call sound economic policies and their benefits for societies in the long run. No doubt that these are fundamental questions of political economy .

3. My lesson number three is: One can “defy” economic laws as much as those in physics. The main economic forces that shaped the economic landscape in the past will continue to do so both on the micro and macro levels. Let me point out just two of these forces. First, globalization is to a large degree driven by scale economies. The more of something you produce the cheaper it is. In our individual countries we tended to produce steel. How can we, from our small economies, compete with Korea or China in steel production today? The answer is, we cannot. And scale economies will continue to exist regardless of the degree of state intervention. Second, the laws of supply and demand are still the best allocators of resources. This does not mean that we are not aware of market failures, but my point here is: Do not throw out the baby with the bath water. Market economies work. Economic agents still make decisions based on relative prices. Private sector driven economy is still the best “development engine that we know”. Of course we should be aware of market limitations and not believe blindly in market efficiency, but state failures are less discussed, but can be much more damaging than market ones.

Financial Inclusion And Financial Stability

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Financial Inclusion And Financial Stability

Increasing financial inclusion is a complex and difficult task

Financial exclusion does not have only microeconomic consequences as those excluded have less opportunity to grow out of poverty and prosper. It can have macroeconomic costs like negative impact on: quality and sustainability of economic growth, unemployment and fiscal revenues as those activities are usually in the shadow economy. All those can contribute to financial instability.

The goal of many emerging economies is to strengthen the capacity to formulate and implement their own growth-oriented, poverty-reducing policies. Too large (however defined) economic inequality can create distortions in economic development and increase the risk of financial instability. One of the obstacles in achieving this goal is that in some countries (like India or a lot of African economies) large parts of population are “financially excluded”, usually the ones that are poor and disadvantaged. They have no access to bank services, from basic bank account to other financial services like loans so, they are often satisfying demand for those services on the grey market, which is much more expensive. Unbanked population can reach up to ¾ of total population. Not only households but SME can be deprived of adequate financial services.

Financial exclusion does not have only microeconomic consequences as those excluded have less opportunity to grow out of poverty and prosper. It can have macroeconomic costs like negative impact on: quality and sustainability of economic growth, unemployment and fiscal revenues as those activities are usually in the shadow economy. All those can contribute to financial instability.

Increasing financial inclusion is a complex and difficult task that requires a holistic approach where both demand and supply-side constraints need to be addressed. These range from improving financial literacy, enhancing consumer protection and improving the competitiveness of the financial system. Enabling different financial services at affordable costs to previously excluded parts of society is an important part of this agenda. For example, efficient monetary policy and efficient payment systems can contribute to this goal. Technological innovations like mobile banking can ease supply-side constraints and lower intermediation costs. Furthermore, efficient payment systems can facilitate regional integration in financial services which can have positive impact on financial inclusion. Adequate financial regulation can help from increasing competition in financial system, enabling access to services for those who do not have sufficient balances to open a bank account to identifying and managing risks in the system. For the authorities, the goal should be promoting financial inclusion while preserving financial stability.

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