Bureaucrats into bankers?

The World Bank's new chief economist for Financial and Private Sector Development, Asli Demirgüç-Kunt, has entered the blogosphere with the new All About Finance blog. In her first post, Asli considers whether the financial crisis ought to make us consider turning bureaucrats into bankers. She responds with a resounding "no"!

Research is seldom conclusive, but in the area of state ownership of banking the evidence is as overwhelming as it gets.  When it comes to lending, it appears that the state banks are the best at lending to cronies.  Government officials face conflicts of interest that go against efficient allocation of resources – such as securing their political bases and rewarding supporters.  Overall, greater state ownership of banking is associated with less financial sector development, lower growth, lower productivity and even less stability – and it is more damaging at lower per capita income levels where there are typically fewer checks and balances.  So it is no wonder that many countries embarked on privatization programs and ought to continue with them.  Surely this is a difficult process – but there is again plenty of evidence that well-designed privatization can significantly increase bank performance.