Washington for the Joint World Bank / IMF /
Federal Reserve Bank Conference, June 6, 2013

It’s a great pleasure to join you here this evening.

The issues you’re dealing with, at this conference, are crucial to ensuring a recovery from the global financial crisis and a return to economic growth.

Maintaining the strength, stability and resilience of our banking systems and our capital markets is absolutely critical – and, indeed, it’s an indispensable factor in achieving the goals we all share – and fulfilling the World Bank Group’s mission: eliminating extreme poverty and building shared prosperity.

Your conference has been hearing from a remarkable group of experts on various aspects of banking regulation and international finance.

On behalf of the Bank Group: Earlier this evening, my colleague Bertrand Badre offered you some important insights on the need for effective regulatory oversight – and on the need for wise judgment and sound practices throughout the world of finance.

And tomorrow, you’ll hear from our President, Jim Kim, who’ll discuss your efforts in the context of achieving the Bank’s over-arching strategic goals.

In my remarks this evening, I’ll approach this topic from the perspective of the part of the Bank that I lead – our Network on Financial and Private Sector Development.

The heart of my perspective is this: Maintaining a robust and resilient Financial Sector is a crucial factor in creating a positive economic environment that supports job creation. A strong and soundly managed financial system is essential for generating jobs – and is a powerful factor in lifting people out of poverty.

The role of responsible leadership in finance is, thus, pivotal:

By ensuring that the Financial Sector allows capital to flow effectively toward its most productive uses – and by ensuring that financial systems are resilient enough to withstand sudden shocks – sound finance contributes to meeting the job-creation challenge.

By contrast: As we’ve learned from bitter recent experience: When a financial crisis hits, all aspects of a nation’s economy suffer.

In terms of GDP, for example: During the Asian financial crisis of 1997, Indonesia’s GDP was cut in half – and Thailand’s was cut by one-third.

In its crisis of 1980, Argentina’s GDP shrank by 45 percent. Ghana in its crisis of 1982, and Uruguay in its crisis of 2002, lost about 30 percent of their GDP.

Moreover: The evidence – drawn from studies of 147 financial crises in 116 countries between 1970 and 2011 – suggests that the most painful and most dramatic impact of a financial crisis is on job creation. Financial crises are transmitted to households most strongly, and most directly, through the labor market channel.

That was certainly the case in the global financial crisis that started in 2008.

The crisis pushed 120 million people, worldwide, below the poverty line – and it created 22 million more unemployed in a single year. It reversed years of development progress.

In the Eurozone, the unemployment figures released last week showed that 19.4 million people are jobless – 12.2 percent of the labor force.

And in the hardest-hit countries among the 17 nations of the Eurozone, youth unemployment exceeds 50 percent. That painful human toll is a dramatic testament to the power of the Financial Sector – and to the scale of the catastrophes that can occur, when crises are not prevented.

With many of the world’s largest economies still struggling to emerge from the post-crisis slump, job creation is the top priority of policymakers worldwide. The job-creation challenge is made all the more severe because of another factor that we can foresee, straight ahead of us: because of the demographic surge that is approaching.

Within the next 15 years – by the year 2028 – the global economy will need to create 600 million jobs just for the new entrants into the labor force – and even that blistering pace, globally, would not reduce the unemployment rate below today’s level.

As the Bank Group’s most recent World Development Report has shown: The Private Sector will have to create 90 percent of those new jobs.

The magnitude of that challenge is truly daunting.

In response to the demand voiced by our client countries, our Network within the Bank Group is focusing additional resources on Private Sector job creation – and an essential part of that task is ensuring that a sound, and well-regulated, Financial Sector can do its part to finance economic growth.

The connection between the Financial Sector and the Private Sector is the reason why the Bank Group has structured our Network to encompass both of those sectors – because they naturally work together.

Any country’s economy, and the global economy, cannot possibly enjoy the benefits of a robust Private Sector unless it also has a thriving Financial Sector – which can effectively channel capital toward job-creating, productive enterprises.

Indeed, let me put it this way – as a thought experiment:

Can job creation occur without a thriving Financial Sector?

Can countries and companies invest – and create enduring, high-quality jobs – without tapping into robust capital markets?

Clearly, the answer is “No.”

Private Sector growth requires the lubrication that can only be supplied by a strong Financial Sector.

Moreover: We know what broad economic and social benefits flow when a country has a healthy Financial Sector:

Smooth-functioning financial systems – operating with honesty and integrity – strengthen poverty alleviation and help the poor.

Stronger financial development leads to a faster decline in the percentage of the population living in poverty – and leads to a lower incidence of poverty, compared to other similar countries.

Strong financial systems lead to more inclusive growth.

In countries with more-developed financial systems:

The incomes of the poorest 20 percent of the population grow faster; income inequality falls more rapidly; and credit constraints are less severe.

The dynamism of the Financial Sector helps advance progress at every level of society.

At the economy-wide level, job creation is spurred when the Private Sector can readily tap into deep capital markets.

At the firm level, companies’ growth is strengthened when they can gain access to working capital.

And at the personal and family level, individuals can prosper when the financial system is inclusive, cost-effective and secure.

So we all have a critical stake in ensuring the vitality of efficient, secure, inclusive and well-regulated banking systems and capital markets.

That’s especially important as we promote the ideal of Financial Inclusion – to help the 2.5 billion people who are now financially excluded – who lack access to any type of formal financial product or service – to gain a foothold on the first rung of the ladder toward prosperity. Together with our partners and our clients – with whom we have long had constructive working relationships – the Bank Group contributes to building a dynamic and robust economic environment.

Among all the International Financial Institutions, I believe that the Bank is uniquely positioned – because we work continuously with Finance Ministries, Central Banks and capital-market regulators about their countries’ priorities.

We have pursued energetic engagements spanning decades – and extending across a broad range of issues – to meet our client countries’ evolving needs.

The Bank is also distinctive among International Financial Institutions because we bring a long-term perspective to Financial Sector issues – along with a global and cross-sectoral perspective. We pursue our Financial Sector efforts in the context of the broader array of concerns that we work on to advance our clients’ development priorities.

The Bank Group is well-equipped to be an active and wide-ranging development partner, offering our client countries deep Financial Sector capabilities.

We’re aiming to continue investing in our Financial Sector capabilities, so that we can help developing countries in every type of economic environment: helping them enjoy the benefits of financial globalization, when the system is operating smoothly – and helping them ride out the shocks, whenever a financial crisis occurs.

Through improved coordination and strengthened standards, policymakers and private-sector leaders – working closely together – have a vital role to play in creating a more secure Financial Sector:

Robust financial systems can help inspire a virtuous cycle of growth, actively lifting millions of people out of poverty.

And resilient financial systems can help prevent millions of people from falling into poverty whenever a crisis strikes.

The World Bank Group is looking forward to continuing our close work together with you – so we can help the global Financial Sector play its important part in advancing toward our shared ideal: eliminating extreme poverty and building shared prosperity.

Thank you very much.