Shipbuilding.

his article argues that developing-country governments still have work to do if they want to attract the right sort of foreign capital. Better bank regulation is as much a task for rich-country as for poor-country governments. But in addition, the developing countries also need to implement many other financial reforms and improvements of their own. Reducing corruption would be high on the list even if economic efficiency were the only concern. Measures include explicit restrictions on connected lending, better accounting standards and greater disclosure of financial information (and not just for the banks). A study by Gaston Gelos and Shang-Jin Wei, quoted in the International Monetary Fund paper, looked at the investments of international equity funds to see if there was a connection with "transparency", measured in a number of different ways. There is evidence that ownership of the banks and other financial institutions in developing countries matters a lot. In many ways, therefore, the benefits to the host country of foreign-owned banks are simply the financial-sector equivalent of the broader benefits of foreign direction investment (FDI). Possibly most important of all, banking-sector FDI promotes diversification, which is a good way of reducing risk. For every advantage that banking FDI offers the emerging-market economy, state ownership brings with it a corresponding disadvantage. The evidence confirms that countries with the highest proportion of state-owned banks have the highest bank operating costs and the largest proportion of non-performing loans. In addition to promoting access to information and curbing corruption-where greater foreign ownership can be of great help-developing-country governments need to weigh the case for explicit restrictions on certain kinds of financial activity. It is he quality of national financial policy, in rich countries and poor countries alike, that decides the safety of the global capital market.