Pension reforms if correctly done can also have a significant impact on financial market development when pension funds are encouraged to act as institutional investors involved on the capital market. Participation of pension funds in the capital market can lead to improved clearing and settlement on the one hand, as well as provide more sensitive price information – resulting in better resource allocation, and increasing the availability of capital for financing development. In some developing countries such as Chile, pension funds facilitated internal resource transfers, enabling the government to service its international debts without extreme fiscal adjustment and avoided the drainage of resources that emanates from foreign debt payments. In addition, the funds provided a source of borrowing that did not require excessively high interest payments. Africa can learn from such experiences and undertake necessary reforms to unlock this kind of resource. Pension funds can therefore offer African countries an alternative source of development finance, provide an avenue for restructuring public finances and for the promotion as well as development of the capital markets. 3  Harvey Morris, ‘African states tap pension funds’, in the Financial Times, 24 October 2007. BIS Review 126/2009  3  (c)  Stock markets  Another important avenue for harnessing resources for the financing of development on the continent is the stock market. Stock markets have grown in number across the globe over the past two decades and emerging and developing country markets have accounted for a significant share of this growth.
Despite that, as we have seen only too clearly, it is next to impossible to stabilise activity in the face of a financial crisis, as indebted households, businesses and intermediaries all seek to de-leverage simultaneously. Moreover, the upswing of the credit cycle is frequently associated with an increase in lending to purchase assets, especially property; that was certainly true on this occasion. If the consequence is an investment or construction boom – as was the case in the United States, Ireland and Spain – the result is a capital overhang that needs to be worked off. There are welfare gains from avoiding such capital misallocation. That leads naturally to my fifth lesson: prevention is better than cure. 5  The marginal funding cost is the three-month Libor plus the average of the five-year CDS premia of the major banks. The corporate loan rate is the three-month Libor plus the average of the spread on sub-investment grade syndicated loans. 6  If no other policies were available, then one might be tempted to conclude that the inflation target should just be higher in normal times, as advocated by Olivier Blanchard, Giovanni Dell’Ariccia and Paolo Mauro (2010). By ignoring the other policies that are available to deal with, and prevent, financial crises, to my mind this is giving up too easily. 6  BIS central bankers’ speeches  But how best to do that? Could a different choice of monetary policies have led to a better outcome?