Figure 6 Supply side Figure 6. Financial market for risk allocation
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Figure 1. Fields of entry for graduates of the Massachusetts Institute of Technology Another important characteristic is the intensive use of mathematics in finance (Wilmott 2000). The increase in the size and complexity of the financial sector has been driven by financial innovation. As noted above, financial sectors have been recruiting increasinc numbers of the graduates of science, engineering, math and physics programs tc administer new and complex financial instruments. Figure 1 above, taken from Kedrosk and Stangler (Kedrosky and Stangler, 2011:6), depicts the fields of entry for graduates o MIT. The preponderance of the financial sector is clear and embodies the link betweer hard science disciplines, such as physics and mathematics, and finance. Figure 2. Annual balance sheet growth of NYSE listed and non-listed companies Figure 3. The edifice of the Efficient Market Theory Hypothesis (Mandelbrot and Hudson, 2004, Walter and de Pracontal, 2009). Figure 3 below represents the intellectual edifice necessary to argue that financial markets provide investors with accurate signals. As noted above, this edifice has been questioned by the behavioral finance and the noise trader literature. Additionally, post- Keynesian perspectives have consistently been critical of the neo-classical assumptions on which EFMT rests. Moreover, an important body of literature has repeatedly criticized the statistical and mathematical models used to describe and construct financial markets (Mandelbrot and Hudson, 2004, Walter and de Pracontal, 2009). Figure 4. Conceptualizations of external economic reality (time horizon added by the author) he goal here is not to write a philosophical treatise on uncertainty, but to show hov ieoclassical economic assumptions, on which financial economics rests, have eliminate ne long-term perspective. Neoclassical economics assumes that economic phenomeno! lappen in an ergodic world. It assumes that the process generating change is the sam ver time and since it is impossible to draw samples from the future, one can us iverages from past observations. It cannot be very different from future outcomes jowever, these predictions can be accurate only on a very short time horizon. Financie conomics emerged as a discipline with these neoclassical hypotheses. As mentione arlier, the development of financial economics is intimately related to the law of norme listrioution. Price changes are independent from each other, but the process generatin: nese changes does not evolve and follow the proportion of the bell curve. In other words rices might be erratic and follow a Brownian motion or a random walk, but financie conomic still assume that, in the short run, it is possible to know where particles ar kely to move. Ironically, these assumptions became less realistic as financial market leveloped and volatility increased. Now that instability is the necessary condition o1 vhich the business models the most powerful players of the financial industry rest, | yecame increasingly clear that the ergodic assumptions that laid the intellectue oundation of financial economics, even if practically useful, are hiding the wil novements of the markets. In any case, the consequences of the “Brownian philosophy horizon and thereby accepts true uncertainty in the Keynesian sense of the term. Source: (Meier and Anhorn, 2010:7) Meier’s and Anhorn’s own calculation based on Eurohedge database Figure 5. Development of market shares by domicile of HF management Source: World Economic Forum, (Roubini and Bilodeau, 2008:5) Figure 7. Composition of the financial development index (costs of financial development added in red by the author) Thus, financial development has to be considered against the background of financial innovation and complexity and the costs they produce. These costs are ref in a modified version of the Financial Development Index designed by Bilodeau (2008), as figure 7 below shows. As it became quite obvious for o phenomena (economic growth or financial liberalization), a financial deve ected (in red) Roubini and her economic opment index should include “qualitative” elements to capture the quality of financial deve opment. Such a costs approach would question financial development as an unconditionally beneficial process. Figure 8. The costs of large financial sectors: An institutional perspective Figure 11. Formal and informal institutions to support investor's participation Figure 11 above attempts to convey the separation of financial sectors from society. attempts to schematize what occurs when bankers ceased to be “thought of as staid al sober men, grave-faced and dressed in conservative black pinstripe suits, jealous of th reputation for caution and for the careful guardianship of their customers’ mone (Strange, 1986:2). Formal regulatory rules no longer have an effect. They see ineffective in providing transparency and protecting investors; in other words, they see ineffective at reducing uncertainty. Because trust and regulation are complementai distrust creates a public demand for government regulation (Carlin et al., 2009, Agarw et al., 2011). The regulatory response in the form of strict prudential requirements (Bas lll, stress tests, the Financial Stability Board) is a good example of the complementa relationship between trust and regulation. For Guiso (2010), these measures targ confidence in the solvency of financial institutions and not broader “social trust”, which negatively affected by fraud and cheating. Social trust is captured by the definiti provided by Gambetta, “as the subjective probability with which an agent assesses tt another agent or group of agents will perform a particular action” (Gambetta, 2000:217). is closely related to knowledge and required in all situations in which “others kne something about themselves or the world, which the person in question does not, al when what that person ought to do depends on the extent of his ignorance of the matters” (Dasgupta, 2002:8). There is a strong link between trust and information, and then unsurprising that geographical distance seems to play a role in the development trust. Local knowledge is an important element (Guiso et al., 2004). This chapter will a one ingredient - fairness - to the recipe for social trust. * included state organization whose number account for 10% of all organization This exclude financial activity SMEs Turnover by kind of activity, 2009 (In billion RUB, source: Rosstat Source: Own calculations based Rostat Source: Rosstat http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/enterprise/reform/# could not be found; hence, we can only cite Komkov’s figures for the added value of small The small, innovative firms that disproportionately contribute to a Western economy’s GDP are not present in Russia. Innovative SMEs, which play a more active role in promoting value-added economic growth, are quasi-absent from the Russian economic scene. Despite being constantly mentioned in political discourse as the key to economic diversification, the number of innovative SMEs in Russia has actually decreased (Komkov et al., 2011). Only 2.6 percent of Russians constitute a new pool of potential Source: IFC indicators (2012) http://www.enterprisesurveys.org/reports Financial sector indicators for 2012 Styrin’s division of Russia’s banking sector into four categories remains valid (Styrin, 2005): segregation, inefficiency and the domination of Sberbank. A brief overview of the banking sector reveals that its structure is not conducive to the Structure of SMEs loan market (2011) (source: Expert RA and Central Bank of Russia and own calculation) Figure 17. Structure of leasing and factoring deals The structure of SMEs provides few investment opportunities to Russian banks. The limited number of medium-sized firms and innovative companies does not trigger financial development. The structure of the financial sector is also not conducive to SME financing. Large banks belonging to industrial conglomerates and state-owned financial institutions are poor financial intermediaries for independent SMEs. Thus the state of SME finance in Russia appears to represent a vicious circle. SMEs require financial means to develop, while the financial sector waits for the SME sector to become developed before providing financing. This echoes the chicken-and-egg debate on whether finance precedes economic development. After 20 years of transition, the economy has not become diversified, and the financial sector does not perform its allocative function (Page, 2011). As noted earlier, there have been some improvements, but these have not influenced SME financing. Woodruff (1999) provided a gripping account of the monetary reforms that occurred before money regained its universality. The Ruble lost its universal value after the 1930s and was partitioned. Its value was subordinated to the status of its owner. Money in the Soviet system was considered no more than the “lubricant of production’. However, when market liberalization occurred, the origin of economic value was still located in production, as the entire Soviet economic system preferred production to monetary stability. Figure 20. Informal and formal institutions to support investor's participation Russian sociological landscape and that have affected how SM the banking sector. Thus, the structure of banking sector in institutional inertia. However, if the former institutional regime af development, this is also because of more modest, quotidia The following section details the informal norms and habits that are prevalent in the Es secure financing from Russia reflects a sort o ects the banking sector’s n habits. By adopting 4 sociological, “bottom-up” approach, one can observe that if t institutions. he banking sector neve! developed a tradition of financial intermediation, this is also because of these informa
