“ scores ” in five areas, while figure 2 adds in, by way of comparison, the other g5 countries. mapping the distinctions is not an easy task. for instance, though in germany a government office is responsible for banking supervision, it is central bank staff who undertake much of the day - to - day work of monitoring individual banks. in france, supervision is the responsibility of the commission bancaire, but its secretariat is effectively part of the banque de france, and the governor chairs it. and in japan, the central bank closely monitors the large banks, though the responsibility for supervision formally rests with the finance ministry. furthermore, the extent of a country ’ s total financial regulatory effort encompassed by the term ‘ banking supervision ’ varies - most british banks have set up separate subsidiaries for their trading activity, regulated by securities regulators ( though the responsibility for consolidated supervision remains with the bank of england ) ; by contrast, european banks tend to retain trading within the banking entity. it is also not always apparent whether the central bank is in practice free to set interest rates to achieve the monetary policy objectives which derive from its own statutes or from objectives set by government. the bundesbank clearly has that freedom ; and the other eu member states have been legislating in accordance with the maastricht treaty to give their central banks independence in the field of monetary policy. in britain, even though there have been very welcome improvements in the transparency of monetary policy formulation since 1992, decisions on interest rates remain clearly with the chancellor of the exchequer though now within a clear inflation target framework. in japan the position is under review. the ultimate authority on interest rates has rested legally with the minister of finance, though according to goodhart, capie and schnadt “ it is widely understood that it would be extraordinary if the government resorted to these provisions, and they have never been enacted ”. 2 the same authors conclude that the bank of japan “ has thus enjoyed independence in practice ”. what is harder to judge is the extent to which the bank of japan ’ s decisions may have been influenced at times by recognition of the latent ministerial powers. notwithstanding those nuances, what can be seen from figure 2 is that the bank of england is quite distinctive amongst the five leading industrial countries. we have : • the least independence in setting interest rates ; • the most comprehensive responsibility for banking supervision ( though some other banks have broader financial regulatory responsibilities ) ; • the greatest role in managing government debt - we

frederic s mishkin : globalization and financial development remarks by mr frederic s mishkin, member of the board of governors of the us federal reserve system, to the new perspectives on financial globalization conference, international monetary fund, washington dc, 26 april 2007. * * * in the united states and many other countries, students learn that the key to success is hard work. yet when we look at many developing countries, we see people who work extremely hard for long hours. their wages are low, and so they remain poor. and as a whole, their countries remain poor. if hard work does not make a country rich, what does? the right institutions are essential. nobel laureate douglass north defines institutions as the " rules of the game in a society, or, more formally, humanly devised constraints that shape human intervention. " ( north, 1990, p. 3 ). among the institutions that are most crucial to economic growth are those that enable a country to allocate capital to its most productive uses. such institutions establish and maintain strong property rights, an effective legal system, and a sound and efficient financial system. in recent years, the field of economic development has come to the conclusion that " institutions rule " and are critical to economic growth. 1 an extensive literature focuses on financial development as a significant force driving economic development. 2 however, developing good institutions that foster financial development is not easy : it takes time for institutions to evolve and adapt to local circumstances. in addition, vested interests in poor countries often oppose the necessary reforms because they believe that such reforms will weaken their power or allow other people to cut into their profits. how can poorer countries overcome these obstacles? how can they change the distribution of power to forge the political will to promote institutional reform? the answer is globalization. i should note that the opinions i will express today are my own and not necessarily those of my colleagues on the federal open market committee ( fomc ). elements of institutional reform before examining the role of globalization in promoting financial development, let ’ s first look briefly at what steps must be taken to build an institutional infrastructure that will ensure a well - functioning financial system. 1. develop strong property rights strong property rights are needed to encourage productive investment because it will not be undertaken if the returns on investment are likely to be taken away by the government or others. hernando de soto, in his important book the mystery of capital, argues that the inability of the poor in developing countries to acquire property rights