channeled toward low - return projects and insufficient capital to be directed toward the high - return projects needed to propel income and growth. moreover, deterioration in banks'balance sheets caused by insider lending or excessive risk - a discussion of how the costs of doing business vary across a number of countries is in world bank research finds that increases in corruption are associated with lower growth ( for example, mauro, 1995 ). wei ( 1997 ) also finds that corruption significantly reduces foreign direct investment, which is generally considered to be beneficial to growth. taking that leads to a proliferation of bad loans can cause banks to cut back sharply on lending, with negative effects on the economy. if the deterioration in banks ’ balance sheets is severe enough, it can result in banking and currency crises that substantially disrupt the economy, phenomena that unfortunately have been all too common in developing countries over the past several decades. 5 preventing banking crises must start with prudential regulation, in which rules set by the government ensure that banks have sufficient capital and manage risks well. to guarantee that these regulations are enforced, the government must also engage in prudential supervision, in which it monitors banks by examining them on a regular basis to ensure that they are complying with government regulations. the role of microfinance in developing countries is receiving much attention these days. microfinance is a positive development ; it has clearly helped substantial numbers of poor people escape poverty, and the nobel peace prize awarded to muhammad yunus for his pioneering efforts in this area was certainly well deserved. 6 however, microfinance is not a substitute for the institution building i am talking about here. globalizing to advance institutional reform now that we understand what kinds of institutions are needed to promote financial development and economic growth, let ’ s turn to the question of how developing countries can improve the likelihood that these institutions are developed. one of the most powerful weapons for stimulating institutional development is globalization. wealth is not something that can be attained by remaining closed off to the rest of the world. poorer countries would do better by embracing globalization – that is, opening their financial markets and their markets for goods and services to other nations so that funds, goods, and, often, the ideas that accompany them can flow in. such inflows can help them achieve reforms that build productivity and wealth that will benefit all their citizens. of course, countries need to take care that the foundations of the fundamental institutions discussed above are in place, and they must monitor the pace of reform. opening

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