I. The problem of comparing apples and oranges
Comparison of countries lies at the heart of assessing financial sector performance. In doing so, analysts often simply compare financial sector indicators such as credit to the private sector as a percentage of GDP for a given country to a regional average or a set of "representative" countries.
However, such comparisons are only accurate to the extent that the selected benchmark is appropriate. In practice, countries often differ substantially in terms of structural factors that affect financial development. Thus, a simple comparison can lead to inaccurate conclusions.
Figure 1 below displays a simplified example that demonstrates the core of the issue. It shows dots that represent countries with different “structural factors” (e.g. population density) plotted against their “financial development”, i.e. the extent to which the financial sector fosters economic growth via better risk sharing and more productive investments. The figure shows that in terms of financial development, Country B is better than Country A in an absolute sense.