Chapter 4:Assessing Financial and Financial Development Fourth,financial sector deficiencies may also be traced toproblems in the counry's wider economic infrastructures,including the education,transportation,and com munications systems.Furthermore,many developing countries are faced with the difficulty that effective finance requires a scale of activity that may be beyond the reach of small economies,populated as they are by a small number of small clients small intermedaries and small organized markets (see Bossone,Honohan,and ong 2002).An effective financial m while rib ting to wider growth and developmen is also somewhat dep nt on the wider economic 4 environment-not least the macroeconomic and fiscal environment The most distinctive feature of financial structure analysis and development assess ment is the focus on the users of financial services and on the efficiency and effectiveness of the system in meeting user needs.Policy reforms that benefit users and that promote financial development are generally favored in such analysis and assessments.The pro t framew ork is also guided by the p ption,which is based on a sizable iricale dence,that an effectiv ve and effic ent finan ial system is best provided by market-driven financial service providers,with the main role of goverment bei serve as regulator and provider of robust financial infrastructure.Therefore,the establish ment of a government-sponsored financial service provider is not seen as likely to be the first-best solution to deficiencies.Instead,the role and effectiveness of financial service providers are assessed regardless of whether they are government owned.Assessment has wo phases:information gathering and analytical reporting. Phase 1:Infommation-Gathering Phase To reflect this focus on users and the services they require,the overall assessment needs to adopt a functional pproach and not to b to a perspective that is be ased on existing institutional dividing lines b fferent groups of providers Nevertheless much of the information gathering will inevitably reflect those institutional divisions,not the least because national regulatory structures are typically organized along those lines (notwithstanding the trend to integrated supervisory agencies in several countries). In addition,the adequacy of the legal,information,and payments infrastructures and of other ts of the rall polic the develop nent:each ance cutting acr any single sec Yet rma bou the effectiveness of the infrastructures and ab eff of the policy environment is often obtained only by learning how each sector works Likewise,the competitive structure,efficiency,and product mix of the various sectors can be explained only on the basis of an understanding of the design and performance of the infrastructures.So the information-gathering phase of the assessment needs to have a sectoral,as well as an infrastructural,dimension.Cross-utting policy issues such as taxa tion also need to be kept in mind.Finally, user perspect be helpful,es dentifying gaps in providing markets and services,as well as in discovering deficiencies in quality and cost that might not be revealed from analysis of the suppliers. The information-gathering phase of the assessment is multidimensional.Typical com- ponents of the information-gathering phase may include the following: 7171 Chapter 4: Assessing Financial Structure and Financial Development 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 • Fourth, financial sector deficiencies may also be traced to problems in the country’s wider economic infrastructures, including the education, transportation, and com￾munications systems. Furthermore, many developing countries are faced with the difficulty that effective finance requires a scale of activity that may be beyond the reach of small economies, populated as they are by a small number of small clients, small intermediaries, and small organized markets (see Bossone, Honohan, and Long 2002). An effective financial system, while contributing to wider economic growth and development, is also somewhat dependent on the wider economic environment—not least the macroeconomic and fiscal environment. The most distinctive feature of financial structure analysis and development assess￾ment is the focus on the users of financial services and on the efficiency and effectiveness of the system in meeting user needs. Policy reforms that benefit users and that promote financial development are generally favored in such analysis and assessments.1 The pro￾posed assessment framework is also guided by the presumption, which is based on a sizable body of empirical evidence, that an effective and efficient financial system is best provided by market-driven financial service providers, with the main role of government being to serve as regulator and provider of robust financial infrastructure. Therefore, the establish￾ment of a government-sponsored financial service provider is not seen as likely to be the first-best solution to deficiencies. Instead, the role and effectiveness of financial service providers are assessed regardless of whether they are government owned. Assessment has two phases: information gathering and analytical reporting. Phase 1: Information-Gathering Phase To reflect this focus on users and the services they require, the overall assessment needs to adopt a functional approach and not to be confined to a perspective that is based on existing institutional dividing lines between different groups of providers.2 Nevertheless, much of the information gathering will inevitably reflect those institutional divisions, not the least because national regulatory structures are typically organized along those lines (notwithstanding the trend to integrated supervisory agencies in several countries). In addition, the adequacy of the legal, information, and payments infrastructures and of other aspects of the overall policy environment are central to the development assessment: each has relevance cutting across any single sector. Yet, information about the effectiveness of the infrastructures and about the unintended and hidden side effects of the policy environment is often obtained only by learning how each sector works. Likewise, the competitive structure, efficiency, and product mix of the various sectors can be explained only on the basis of an understanding of the design and performance of the infrastructures. So the information-gathering phase of the assessment needs to have a sectoral, as well as an infrastructural, dimension. Cross-cutting policy issues such as taxa￾tion also need to be kept in mind. Finally, user perspective can be helpful, especially in identifying gaps in providing markets and services, as well as in discovering deficiencies in quality and cost that might not be revealed from analysis of the suppliers. The information-gathering phase of the assessment is multidimensional. Typical com￾ponents of the information-gathering phase may include the following: