How To Understand The Relationship Between Economic Development And Growth

Transcription

1 Andrea F. Presbitero Pagina web: Dipartimento di Economia Università Politecnica delle Marche Credito, Finanza e Sviluppo nei PVS

2 Financial Development and Growth Levine (2004) classifies 5 broad functions provided by the financial system: 1 reduction of informational asymmetries and better allocation of capital (i.e. innovation, HC); 2 monitoring firms and corporate governance; 3 risk sharing/diversification; 4 pooling of savings (ambiguous effect, via lower saving rate); 5 lower transaction costs, so increased specialization and innovation.

3 A simple model There are many endogenous growth model with financial intermediation explaining GDP growth. AK model, resulting from external economies (Romer, 1989) or Human Capital (Lucas, 1988). Hypothesis of the Pagano s (1993) model: 1 population stationary; 2 closed economy; 3 no government; 4 one single good invested or consumed. The degree of efficiency of the financial system as an effect on the steady state growth rate.

4 The model 1 Production function: Y t = AK t 2 Investment equation: I t = K t+1 (1 δ)k t 3 Equilibrium condition: I t = S t = sy t 4 A fraction (1 ρ) of savings is lost because of financial intermediation, so that the new equilibrium condition becomes: I t = ρs t 6 The growth rate of GDP is given by: g Y = Y t+1 Y t Y t = Y t+1 Y t 1 = K t+1 K t 1 = (1) = I t + (1 δ)k t K t = (ρs t δk t ) = ρas t δ (2) K t K t Y t 7 As a result: g Y = ρsa δ

5 Main results and issues The growing body of empirical research, using different statistical procedures and data sets, produces remarkably consistent results: (1) countries with better developed financial systems tend to grow faster; (2) simultaneity bias does not seem to be the cause of this result; and (3) better functioning financial systems ease the external financing constraints that impede firm and industrial expansion. The major issues are financial development measures and reverse causality (Durlauf, 2004). The main improvements of empirical literature are methodological, so we focus on recent papers. The first and most important contributions are by: 1 Goldsmith (1969): positive correlation between FD and growth; 2 King and Levine (1993): finance predict growth, but causality id still unsolved.

6 A micro approach To address the causality issue, Rajan and Zingales (AER 1998) propose a new approach. The basic idea is that industries more dependent on external financing will grow faster in more financially developed countries, on the ground that financial markets help overcome moral hazard and adverse selection. Investigation of the impact of financial development (FD) on economic growth in 41 countries and 36 industries over the period

7 Methodology Identification of industry s need for external finance (EF), using US data. Critical assumption: there are technological reasons why some industry depends more than other on EF, and these differences persist across countries. Empirical estimation of the hypothesis that more dependent industries grow faster in countries with more developed financial markets. FD indicators should capture the extent of intermediaries and markets, their efficiency and the regulatory framework: the authors propose different proxies: 1 Domestic Credit to Private Sector over GDP, 2 Capitalization Ratio (market capitalization + domestic credit), 3 Accounting Standard in 1990 and in 1983.

8 Results and implications Industries with higher ED growth more in countries with more financially developed. The differentials in the real growth rates are significant. A firm in the 75 percentile of industry ED (Machinery) and of country FD (Italy) grows 1.3 percentage points faster than one collocated in the 25 percentile of ED (Beverages) and FD (Philippines). Financial development could trigger the rise of new firms, enhance innovation and growth (Schumpeter). Financial market imperfections have an impact on investment and growth. The lack of financial development favors incumbent firms over new entrants, affecting size composition and market concentration.

9 A macro approach Cross country analysis: the usual growth regression suffer from endogeneity and omitted variable bias. Two possible solutions: IV and GMM dynamic panel estimation. Levine, Beck e Loayza (JME, 2000) follow both strategies finding that: 1 differences in legal and regulatory systems explains differences in financial development, and 2 better financial intermediaries accelerates economic growth.

10 Financial intermediation Commercial banks assets over all banks assets (Comm. banks + Central Bank) : commercial banks should better identify profitable opportunities, manage risks, mobilize saving, etc. Liquid liabilities over GDP, to capture financial depth (Goldsmith, 1969; King and Levine, 1993); Credit to the private sector over GDP : it excludes credit issued by the CB. It is a measure of the level of financial services.

11 Results The basic idea is that differences in legal origins ((French, English, German and Scandinavian)) are connected to legal and regulatory systems which define financial intermediaries activity. Results show that legal origins are significantly correlated with financial intermediary development and the latter is positively correlated with per capita GDP growth ( ). These findings are confirmed using panel data. The economic impact of financial intermediation is large: if Argentina, i.e. passed from 16% in private credit to the developing countries average (25%), GDP would have grown more than 1% faster per year.

12 Productivity or Capital Accumulation? With a very similar approach Beck, Levine and Loayza (JFE, 2000) study the channels through which FD affects economic growth. They look at three possible channels: 1 private saving rates, 2 capital accumulation and 3 Total Factor Productivity (TFP) growth. Financial intermediation (Private credit) has a strong and significant impact on GDP and TFP growth. The relationship with capital accumulation and private savings is less robust.

13 Implications Financial intermediaries help explaining both per capita GDP and total factor productivity growth. There is evidence in support of the Schumpeterian view of finance and development: better financial intermediaries spur economic growth via productivity growth and technological change. Financial intermediaries affect the resource allocation. There is also some contrarian evidence in favor of capital accumulation (Hicksian view, 1969).