Journal Article•
Financial structure and economic growth : a cross-country comparison of banks, markets, and development
TL;DR: A broad cross-country assessment of the ties between financial structure and economic growth is presented in this paper, where the authors focus on developing countries and compare bank-based and market-based systems and conclude that strong legal rights for outside investors and the overall efficiency of contract enforcement are effective tools for developing financial sector and the economy.
Abstract: This is the first broad cross-country assessment of the ties between financial structure -- the mix of financial instruments, institutions, and markets in a given economy -- and economic growth since Raymond Goldsmith's 1969 landmark study Most studies focus on developed countries and compare bank-based and market-based systems Debates over the relative merits of the two systems have relied on case studies of Germany, Japan, the United Kingdom, and the United States, countries with similar long-run growth rates The absence of data on developing countries limits the usefulness of such studies for policy makersThe book contains recently acquired cross-country data from almost 150 countries It includes information on the size, efficiency, and activity of banks, insurance companies, pension and mutual funds, finance companies, and stock and bond markets It also incorporates information on each country's political, economic, and social environment The chapters contain a mix of case studies, cross-country studies, macro- and micro-oriented approaches, and analytical and empirical work The conclusions point not to markets versus banks, but to markets and banks It is how well a financial system functions that is critical for long-run economic growth The research suggests that strong legal rights for outside investors and the overall efficiency of contract enforcement are effective tools for developing the financial sector and the economy The book includes a CD containing World Bank data
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TL;DR: Li et al. as discussed by the authors examined three sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership).
Abstract: China is an important counterexample to the findings in the law, institutions, finance, and growth literature: neither its legal nor financial system is well developed by existing standards, yet it has one of the fastest growing economies. We examine 3 sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership). The law-finance-growth nexus established by existing literature applies to the State and Listed Sectors: with poor legal protections of minority and outside investors, external markets are weak, and the growth of these firms is slow or negative. However, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the State and Listed Sectors, and provides most of the economy's growth. This suggests that there exist effective alternative financing channels and governance mechanisms, such as those based on reputation and relationships, to support this growth.
2,829 citations
Cites background or methods from "Financial structure and economic gr..."
...Since its inception in the 1980s, Chinas venture capital industry has enjoyed fast growth, in particular since 1992.(13)...
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...National regulatory authorities Finance-size Log (Market capitalization ratio × Private credit ratio) Levine (2002) Finance-activity Log (Total value traded ratio × Private credit ratio) Levine (2002) Finance-efficiency Log (Total value traded ratio/Overhead cost) Levine (2002) Secondary source:…...
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...Levine (2002) Structure-efficiency Log(Market capitalization ratio × Overhead cost ratio); measures relative efficiency of markets vs. banks....
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...…the existing literature, we first find that China’s law and institutions, including investor protection systems, corporate governance, accounting standards, and quality of government, are significantly less developed than most of the countries in the LLSV (1997a, 1998) and Levine (2002) samples....
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...…Log (Market capitalization ratio × Private credit ratio) Levine (2002) Finance-activity Log (Total value traded ratio × Private credit ratio) Levine (2002) Finance-efficiency Log (Total value traded ratio/Overhead cost) Levine (2002) Secondary source: Beck, Demirgüç-Kunt, and Levine…...
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TL;DR: This article found that financial development disproportionately boosts incomes of the poorest quintile and reduces income inequality, and that about 40% of the long-run impact of financial development on the income growth was due to reductions in income inequality.
Abstract: Financial development disproportionately boosts incomes of the poorest quintile and reduces income inequality. About 40% of the long-run impact of financial development on the income growth of the poorest quintile is the result of reductions in income inequality, while 60% is due to the impact of financial development on aggregate economic growth. Furthermore, financial development is associated with a drop in the fraction of the population living on less than $ 1 a day, a result which holds when conditioning on average growth. These findings emphasize the importance of the financial system for the poor.
1,548 citations
TL;DR: In this article, the authors apply vector autoregression (VAR) to firm-level panel data from 36 countries to study the dynamic relationship between firms' financial conditions and investment, and find that the impact of financial factors on investment is significantly larger in countries with less developed financial systems.
1,467 citations
Cites result from "Financial structure and economic gr..."
...Our paper also adds to the recent debate on bank-based versus market-based financial systems (see, for example, Demirguc-Kunt and Levine, 2001a, b, and Beck and Levine (2002), among others)....
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01 Jan 2005
TL;DR: The authors reviewed, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth, concluding that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship.
Abstract: This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.
1,420 citations
TL;DR: In this article, the authors apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries' banking systems.
Abstract: Using bank-level data, the authors apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries' banking systems. They then relate this competitiveness measure to indicators of countries' banking system structures and regulatory regimes. The authors find systems with greater foreign bank entry and fewer entry and activity restrictions to be more competitive. They find no evidence that the competitiveness measure negatively relates to banking system concentration. Their findings confirm that contestability determines effective competition, especially by allowing (foreign) bank entry and reducing activity restrictions on banks.
1,416 citations