Transcript growthfin_slides_AFA - Duke University`s Fuqua School of

American Finance Association Meetings
January 2002
Does Financial Liberalization
Spur Growth?
Geert Bekaert
Columbia University and NBER
Campbell R. Harvey
Duke University and NBER
Christian T. Lundblad
Indiana University
Financial Liberalization and Growth
Controversial exercise
• Liberalization implies consumption booms and
inefficient investment (crisis literature)
• Liberalization may lead to reduced savings
(endogenous growth literature)
• Liberalization may lead to “hot speculative
capital” inducing capital flight (Stiglitz & others)
Financial
Liberalization
Cost of
Capital
Growth
Opportunities
Relaxing Fin
Constraints
Financial
Development
Investment
Efficiency of
Investment
Complex exercise
Growth
Financial Liberalization and Growth
What we already know (too many references to list!):
• Financial/banking development associated with
higher growth
• Cost of capital decreases
• Investment increases
Financial Liberalization and Growth
What we know as a result of our research:
• We document a liberalization effect on growth
with certain "standard control variables"
Financial Liberalization and Growth
What we know as a result of our research:
• The liberalization effect is robust to
– different definitions of liberalization dates
– to business cycle or interest rate controls
– allowing for intensity of liberalization
...and independent of capital account liberalization
Financial Liberalization and Growth
What we know as a result of our research:
• We show the mechanism. Both:
» increased investment, partially through a cost of capital
effect and
» increased productivity (which is different from the
financial development literature)
Financial Liberalization and Growth
What we know as a result of our research:
On the mechanism ...
» Liberalization does not lead to consumption binge
– investment increases
– trade balance decreases
Financial Liberalization and Growth
What we know as a result of our research:
On the mechanism ...
» Investment increases - but you need a minimum
“country quality level” to see effect
– decreased cost of capital associated with more
investment
Financial Liberalization and Growth
What we know as a result of our research:
On the mechanism ...
» Productivity increases
– and this is not just a banking development effect
Financial Liberalization and Growth
What we know as a result of our research:
• We investigate whether part of the effect can be
ascribed to
» macroeconomic reforms
» financial development
» other regulatory reforms
Financial Liberalization and Growth
What we know as a result of our research:
Macroeconomic reforms ...
» Liberalization not spuriously reflecting
macroeconomic reforms
– we control for trade openness, inflation, black market
premiums, and government deficits
Financial Liberalization and Growth
What we know as a result of our research:
Financial development ...
» Degree of banking and equity market development
is important but independent boost from
liberalization
– we examine the size of private credit, equity market
activity, and equity market size
Financial Liberalization and Growth
What we know as a result of our research:
Other regulatory reforms ...
» The financial liberalization/growth effect is not a
post-banking crisis effect
» The enforcement of law and institutions are
important
Financial Liberalization and Growth
Econometric Framework:
yi ,t  k ,k  Qi ,1980   X i ,t  Libi ,t   i ,t  k
where
•yi,t+k,k is real per capita GDP growth between t and t+k
•Qi,1980 is initial GDP,
•Xi,t represents control variables
•Libi,t is a Liberalization indicator variable
Financial Liberalization and Growth
Econometric issues:
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Temporal dimension
Different weighting matrices
Liberalization variable
Choice of “k”
Endogeneity of the liberalization decision
Financial Liberalization and Growth
Data: 4 samples determined by data availability
• Sample I: 95 countries
• Sample II: 75 countries
[macroeconomic and demographic data]
• Sample III: 50 countries
• Sample IV: 28 countries
[add financial development indicators]
Financial Liberalization and Growth
Conclusions
• Financial liberalization spurs growth by 1%
per annum over the five years
• Survives a battery of robustness experiments
• We understand better the channels whereby
growth impacted by financial liberalization
• Liberalization effect not spuriously accounted
for by a host of other events such as macroeconomic reforms
Financial Liberalization and Growth
Conclusions
• Financial liberalization has a very important
economic effect
Financial Liberalization and Growth
Conclusions
• Financial liberalization has a very important
economic effect
• Consider economic impact of improvements plus a equity
market liberalization
Liberalization
Gov/GDP 75th to 50th
Enrollment 25th to 50th
Pop Growth 75th to 50th
Life Exp. 25th to 50th
Liberalization
Total Growth = 3.02%
Financial Liberalization and Growth
Future research
• Growth regimes
• Explore the channels of growth with firm level
data