In Box

When Poor People Sneeze,
Banks Catch a Cold

Infectious disease isn't just a health risk. It can take down an entire financial system. 

Analysts often borrow from the vocabulary of disease to describe financial crises, using words such as "pandemic" and "contagion" to discuss how economic disturbances spread. But recent research suggests a more literal connection between the two: In poor countries, actual disease can infect the financial system.

In a study for the Journal of Banking & Finance, Patrick Leoni and Thomas Lagoarde-Segot of Kedge Business School in France looked at tuberculosis outbreaks in 80 countries between 1995 and 2009. They found that spikes in infections were correlated with reductions in banking deposits, financial system deposits, and private credit -- all key indicators of financial stability.

The problem is that in poor regions, people find medical treatment expensive -- and generally an out-of-pocket expense. "Once people get infected, they're forced to stop working and use their savings to pay for medical care," Leoni says. When infection spreads, a lot of small withdrawals can send ripples through a fragile financial sector. Bankers, fearing literal contagion, are then forced to anticipate further withdrawals and start dumping long-term investments and taking shorter-term positions. Over time, this conservative behavior affects a country's growth prospects.

The authors note that richer countries with strong social safety nets are more resistant to this phenomenon. But they caution banks in developing countries against knee-jerk responses to health pandemics. Borrowing from the language of medicine, they write that "an essential prophylactic measure is to increase bank reserves, and somewhat reduce long-term risk" when there are signs that a disease outbreak is under way. Saudi bankers, get your MERS reserves ready.

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In Box

Moms vs. Markets

Why home cooking can lead to weaker economic performance -- and more dysfunctional politics to boot.

Mom's home cooking may be comforting, but it could be stunting economic growth.

A provocative paper by economists Alberto Alesina of Harvard University and Paola Giuliano of the University of California, Los Angeles, argues that countries with strong, close-knit family structures tend to underperform economically and, adding insult to injury, have more dysfunctional political systems.

Alesina and Giuliano looked at data from the World Values Survey, which probes national attitudes on questions like whether it is the responsibility of parents to sacrifice for their children and whether kids are obligated to obey their parents unquestioningly. According to these criteria, Scandinavian and Eastern European countries tend to have the weakest family ties, while Southern European, Latin American, African, and East Asian countries have the strongest. (The United States falls somewhere in the middle.) Alesina and Giuliano found that countries with strong family structures tend to have lower interest in political participation and innovation, as well as more traditional attitudes toward women in the workplace. These countries also tend to have lower GDPs and more corruption.

"Strong family structures imply inward-looking attitudes, low levels of trust for people outside the family, and family firms that get passed down from one member to another -- even if the next generation isn't the best person," Alesina says. This is not the "kind of open society and free competition that leads to growth."

As a textbook example, he points to the country where he grew up. "Italy is a society where youngsters are very risk-averse. They live at home until their 30s, young couples live very close to their parents, there's very little social and geographical mobility, and the participation of women in the workforce is very low," he says. "So Italy has been stagnating for a couple of decades."

The researchers are quick to point out, however, that their findings are not an attack on family values. "It's not that family is bad or family is good. It's a trade-off," Alesina says. "In Italy, the family has negative implications for market-driven growth, but may have positive implications for a sense of security and support." Indeed, the paper shows that people living in countries with close families report feeling happier and healthier. Young people striking out on their own might help the economy, but when they need a home-cooked meal or a shoulder to cry on, the invisible hand just won't cut it.

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