financial inclusion and fostering financial stability. In contrast, low tax rates are estimated to have a significant positive effect on the covariance between inclusion and stability—that is, generate or increase synergies between the two outcomes. Greater formalization of the economy—increase in the percentage of firms that formally registered when they started operations in the country—is estimated to introduce or significantly increase the trade-off (this variable is more significant than in the univariate conditioning exercise). Education—enrollment rates in secondary education—is estimated to generate synergies between financial inclusion and stability (although this effect was insignificant in the univariate conditioning). Perhaps the transmission from education could work through improved financial literacy that ensures responsible financial inclusion, with positive implications for financial stability (Klapper, Lusardi, and Panos 2013).

The results are somewhat different when the maximum number of countries are included (Table 6, Column 2), which includes many high-income countries that were excluded in the first exercise immediately above. Here financial openness is insignificant, probably because more high income countries with greater capacity to manage capital flows are included. Low tax rates retain their positive effect, at the 5 percent significance level (a stronger result than the 10 percent level in Column 1). Population density is estimated to have a significant, positive effect on the covariance, and can thus introduce or increase synergies between inclusion and stability (at the 10 percent level)—even though population density was not significant in our univariate conditioning. More densely populated countries may benefit from more intensive social networks that ease screening and monitoring of financial customers, as well as ease the emergence of self-monitoring groups—for instance, credit cooperatives and private guarantee schemes. Other things equal, finance could thus be more responsible in densely populated countries and generate synergies with financial stability by increasing the scale of the market and diversifying exposures of banks. Finally, the depth of the credit information index (the coverage and richness of credit reporting systems) is significant in generating or enhancing synergies between inclusion and stability at the 5 percent level.

The covariance between stability and financial inclusion of firms (Table 6, Column 3 and 4) is significantly influenced by financial openness and education in the smaller sample (column 3) consistently with the aggregate results and the results for the inclusion of individuals. In the larger sample, all country characteristics appear insignificant. This finding is not surprising given that the evidence we obtained from the empirical distributions and the aggregate correlations. Recall that the distribution of the covariances (correlations) between the indicators of stability and of the inclusion of firms is centered at zero and has a normal shape. One interpretation of this could be that the inclusion of firms and stability are uncorrelated and that the normal distribution is due to the white noise disturbances that cannot be explained by country characteristics. This is what we find in our multivariate regression when using the maximum number of countries. Perhaps when even better data on firm inclusion than those from the Enterprise Survey are gathered consistently across countries we will be able to probe the finding in more detail through further research.

The country characteristics explaining the covariance between stability and financial inclusion of individuals (Table 6, Column 5 and 6) show several similarities with the aggregate results but also some differences. As for the aggregate results, the covariance of stability with inclusion of firms is significantly influenced by financial openness fiscal freedom, population density, education, and the depth of credit 6, column 2, 4 and 6, which drops indicators for which coverage is insufficient). It was mostly high-income countries that dropped out in the smaller sample (Annex 4).

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