Download Financial Development and Economic Growth: the Overview and the Research Direction

Financial Development and Economic Growth: the Overview and the
Research Direction
CHEN Pei, LIU Chuan Zhe,
School of management China University of Mining and technology, P.R.China, 221008
Abstract: This text generalize and review the related literatures about the theories and demonstration
research of financial development at home and abroad, perspicuity the research headway of financial
development and economic growth, getting to see from the international trend, it will be the trend and
orientation that estimate the strength that the financial development influences each channel accurately,
explore the research direction that the more valid evaluation method will be the investigate direction;
however, for the our country the article stresses it is an orientation that studying the theories of the
financial development system, studying the relation of each other thoroughly from the aspects of the
theory and substantial evidence that established in the special circumstance of the our country
Keywords: Financial repression; where enterprise leads, finance follows the financial development
，
1 Introduction
1.1 A few concepts
Financial intermediaries
Financial system
Financial market
Fig.1 Financial system
The financial development usually refers is the financial system faces the good aspect to change.
Namely "the financial system scale or the efficiency is enhanced" (Khan, 2,000). Manifests in the
financial activity quantity and in the quality enhancement, or, more directly, reflected in the financial
intermediation or financial market expansion, or the function improvement and the complexity of
enhancement.
What the finance development theories study is whether financial system has the function of
promoting the economic growth or not.
1.2 The formation of the financial development theories
The McKinnon and Shaw are financial developments theories of open mountain founder. In 1973
McKinnon: the currency and the capital in the economic development ; In 1973 Shaw: Finance
Deepening in the economic development .
Henceforth, in a longer period, Theoretical studies have not made much progress, duded to the lack
of analytical tools and less convincing policy proposals. Only taking on the patchwork of McKinnon and
Shaw theories, Empirical research doesn't have any development.
90's in 20 centuries, King& Levine thesis the finance and growth, Schumpeterian is perhaps right
especially announced, starting the empirical research. The financial development theory from this
stepped a stage of booming development, the related literature emerge in endlessly, become in recent
years a hotspot research realm of the foreign economics, in our country, development of financial theory
is even more pronounced.
1.3 The disagreement on the role of the financial system
Studying on the function of financial system to economic growth, the economists have different
viewpoints, concretely saying, it can is divided into three greatest camps.
1. The important function saying.
The Reason: The financial system may provide the financing convenience for the large-scale project,
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thus promoting the industrialization; Bank can provide the financing support toward the entrepreneur
that has a creative opportunity, impels the technical.
2. The counter causal relation saying
The conclusion is the economical growth causes the financial development, but is not the financial
development causes the economical growth.
3. Unimportant saying
The Robert Lucas (1988) thinks the function that the economist overestimates the role of the
financial factor in economic growth. Development economists have often expressed doubts about the
effect on the financial system. They ignored in the last financial. Economic development, including
essays written by eminent scholars who did not mention financial, in the Review of Development
Economics was not mentioned in the financial system.
1.4 The function of the financial system
1. Five kinds of functions in the Levine’s (1997) saying that mobilize savings; Resource allocation;
Implementation of corporate control; Facilitating risk management; to facilitate the transaction
2.Six kinds of functions in the Khans(2000) saying that t Mobilize savings; Allocating savings; Risk
reduction; Have mobility; Facilitate transactions; Implementation of corporate control; Authority
managers.
3. Seven greatest functions in the Coles and Slade (1991) saying
2 The research on the relationship between financial development and economic
growth
2.1 The theoretical research on relationship between financial development and economic growth
1. The macro view study
The macro research is divided into two stages
(1)70-80's in 20 centuries
The means of the financial repression: One is carrying on control of the interest rate; One is
promoting inflationism. The other one is ruling a higher legal reserve level
The financial repression harm to the financial system
The financial repression harm to the economy
From the government's perspective, look at the financial benefits of restraint
(2) the research since 1990's
First, we will introduce the theories frame of Marco Pagano(1993), the Marco Pagano make a
simple on the Endogenous Growth model
AK model, investigate the function of financial
development for economic growth.
①
②
③
④
－
－ AK model:
(1)
= AK
t
t
The Yt means the total output in the t term, the Kt means the capital in the beginning t term, the A is a
constant, and its economic meaning is the unit of capital output or marginal output.
Suppose the capital each term to be reduce with constant rate, namely, the depreciation rate is a
constant(established for the δ ), the t then expects the capital of the beginning t term descend to leave
for(1- δ )Kt in the next term, plus the investment level It in the t term ,the capital save t level is Kt+1 in
the t+1 term, namely:
K t +1 = (1 − δ ) K t + I t
(2)
We assume that the economy is closing inspectional, then it does not have the financial intermediary
cost in the situation, the produce market balanced condition is It = St, St expresses the deposit in the t
term. In the real world, the finance intermediary is engaged in the intermediary activity the general
meeting to consume part of resources, namely the finance intermediary cannot deposit completely
transforms into the investment which mobilizes, a part is detained in the financial department, and this is
the financial intermediary cost. Supposes the ratio Ф deposit is consumed in the intermediary process,
The Endogenous Growth model
Y
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and then under the close economic condition the produce market balanced condition is:
(1 − φ ) S t + I t
Y
And
g
t +1
=
(3)
t +1 −1 =
Y
t
K
t +1 −1
K
t
(4)
(5)
= (1 − φ ) AS − δ
t +1
t
From the top formula we can see, the main factors affecting the growth are the cost of financial
intermediaries’ Ф, the marginal product A and last time deposit rate st . Pagano said the financial impact
on the development of these three factors can exert influence on growth.
2. micro-study
We facilitate micro-depth study revealed the relationship between financial development and
economic growth. Unfortunately, the current theory at the macro level of financial development has
reached a high degree of technical proficiency level. This aspect research results huge collection of
books and but the microscopic angle research literature actually appears extremely rare, this was a
financial development theory soft rib. Since microscopic studies are few, we have a simple introduction.
(1) The influence on the choice of technology entrepreneurs -McKinnon (1973)
(2) the influence on the enterprise growth rate
Kunt and Maksimovic(1998)
(3) The microcosm effect of the financial development1
So
g
－
Saving the transaction cost
Lower the
Financing cost
Gain the low loan interest rate
under the financial restraint
Financial supervision strengthened
beforehand
Financial supervision strengthened
in the middle
Financial supervision
afterwards
Enterprises grow
Financial development
Lower the intermediation cost
Increase the investment net income
Raise
the
financing
volume
Improve the
Investment
efficiency
strengthened
Fig. 4 The microcosm effect of the financial development2
2.2 Demonstration research on the relation of the financial development economic growth.
1. Financial intermediaries and economic growth
The relations between Financial intermediary property value /GNP and the economic growth rate
(Goldsmith, 1,969), the afterwards research added the reflection of the Finance Deepening index.
Conclusion: Have a positive correlativity
2. The stock market and economic growth
Identifying indicators reflect the development of the stock market, and establish the correlation
between per capita GDP. Some use a two-stage least squares (2SLS) variable regression model
estimates, some use the ordinary least squares (OLS) estimates.
（
1,2 reference to the study of tanrutong(2002) Contemporary finance and economics
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，2002.9)
Conclusion: The stock market has the growth effect and the level effect to the financial
development ;( the influence of the GDP growth rate and GDP level); some educe the weak relativity.
3. The law and finance
According to the research of three scholars of LLSV, the quality (Reflected in the categories legal
protection for investors). Mainly is decided by two aspects: one is the characteristic of the law rule; two
is the law implement quality. The Study result enunciation, law for finance development, especially, the
development of the capital market is essential. Because the establishment (economic aspect) of the law
oneself is for the sake of the protecting of the investment, therefore, the finance development can lead
the economy growth.
4. The research in the micro-level
Carries on the research finance system from the industry level to be helpful to overcoming the
reversion choice and the moral risk to lower the business enterprise exterior financing cost
mainly
depending on the exterior financing in the industry development ; industry growth to economy have a
direct function, industry growth performance is two aspects: one is a business enterprise quantity in the
industry; Two is the extension of the existing average scale in the industry. Study enunciation: The
finance development economic effect to the industry unit quantity augmentative almost 200%.than that
to the industry unit extend
5. Carry on a research from the business enterprise layer
The finance development business enterprise exterior financing convenience investment
opportunity increment business enterprise growth acceleration. The stock market develops to the
enterprise financing decision-making influence.
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－
－
－
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3 The conclusion and enlightenment
3.1 Contribution
That western theory research on the financial development is a widespread regulation in the market
economy, is a long-term market economy summary about the practical experience , it is a referential
experience in the finance development and perfect and financial system financial market of the our
country. Some conditions in the western theories and assumption usually are exactly check and
supervisions the bottleneck of our stock market, It can help us to seek wrong, also resolve the issue by
comparing our country's practice with the western fully-fledged theory.
The process that the local scholars issue according to the economic traits of China, in many respects
has already become a consensus. It will lay a strong foundation for the further research. Moreover, what
the scholars put forward the much suggestion in perfecting financial systems also has the much
reference value in practice.
3.2 Shortage
The financial environment that the abroad research mostly turns according to the pure market that
conducts a higher efficiency, the financial system is perfect. It is different with the circumstance of our
country. For the period that economy is switching, the reference function in the substantial evidence
research is limited in addition to studying the method
For the domestic studies, the systematic ness is not strong, valuing the macroscopic research of the
financial development, despising the research on the Micro-level. The substantial evidence in the
macroscopic relation between the widespread concern stock market growth and economic growth is
analyzed by the scholars, however, how to put forward Chinese own standpoint , that is according to that
the whole influence in the Micro-level and the quantity of influence is to be studied.
3.3 The research direction
See from the international trend, the research will have two greatest tendencies in the financial
development. First, in research content, from the point of view of microscopic, the research finance
promoting function in the economy growth, estimating the finance each channel influences and the
dynamic influence factors of economy will be a new content. Second, from research technique, different
to Based on Cross-section data and panel data Analysis Method, Vector Autoregressive Model banes d
on the Time Series Data, can analyze the relation and evolution between the financial development and
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economic growth.
Finance development of china is special, current research is obviously lagging behind. So there are
some breakthrough in studying a method, but lack of the essential theory and practice accumulates the
theories .The point of the current research should be the problem that need urgent solution. It is
necessary to establish a stock market as soon as possible, which can allocate resources effectively,
manage risk properly and enhance a company management etc.
Therefore, the research direction will be concentrated in combing current domestic research on the
factors of financial development, Unifying understanding of the financial development of the theoretical
connotation; revealing the financial impact in the Deeper and micro-level; especially the mid –course;
Finding out the influence factor of finance development and as to it's influence in the economy growth,
also proposing the optimized way and adopting the valid measure.
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The author can be contacted from e-mail : [email protected]
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