توسعه مالی محلی و رشد

Using unique, district-level, economic growth data, I investigate the connection between banking sector development, human capital, and economic growth in Indian districts. Disaggregate data helps avoid many of the omitted variable problems that plague similar cross-country studies. The data show districts to be financially constrained by the lack of local banking sector development, and the relationship may be non-linear. For districts in the sample, moving from the 75th percentile of credit/net domestic product to the 25th percentile implies an average loss of 4% in growth over the 1990s decade. The data also shows that human capital deepening can reduce the financial constraint. In a district at the 25th literacy percentile, the implied growth loss due to a constrained banking sector is twice as large as in a district at the 75th literacy percentile. The results are robust to the inclusion of various controls and changes in specification.

The idea that the financial sector has the potential to affect patterns of innovation and growth goes back at least to Schumpeter (1912). Recent studies on the relationship between financial markets and growth have generally concluded that the presence of strong and efficient financial mechanisms enhances growth. A prominent line of empirical research – started by King and Levine (1993), and extended by Levine and Zervos (1998) and Beck et al., 2000a and Beck et al., 2000b, among others – leverages cross-country data to demonstrate that financial development is an important factor in national economic growth.1 Specifically, this literature shows that future growth in per capita real income is positively correlated with the size and depth of an economy’s financial system (usually measured as the value of a financial aggregate, such as credit, to GDP), as well as other measures that relate to banking sector dynamism including banking law harmonization (Romero-Avila, 2007), financial system structure (Carlin and Mayer, 2003), and banking sector stock returns (Hasan et al., 2009b and Cole et al., 2008).2 However, omitted variable problems systematically contaminate the evidence from these cross-country regressions. We should be particularly skeptical of this evidence because so many researchers have used the data so intensively (see e.g. Levine and Renelt, 1992), who demonstrate the parametric instability inherent in cross-country regressions.

This paper has two main findings. The first is that underdevelopment of the local banking sector is associated with slower growth at the district level in India. The second is that a higher presence of human capital may decouple this relationship in some districts. Statistically, these results are robust to the inclusion of various controls and breaks in the sample and to the use of instrumental variables that identify variation in the supply capacity of the local banking sector. The-cross country literature that investigates the connection between finance and growth shows that the banking sector is an important component of national growth. However, the question of whether such a result would hold within national borders where some elements of capital markets are open and integrated (for instance stock and bond markets, if they exist in a given country, are likely evenly available to firms from different geographies – even if they are not evenly available to firms of different size or along other dimensions) remains open. The results presented here show that even at very small scale, between economies that are likely more integrated in trade and labor markets and where one would expect financial markets are more integrated than between many national economies, the finance-growth connection still holds (and is of similar magnitude). Thus, distant financial development is not a perfect substitute for local financial development. This finding implies that district financial markets are effectively segregated from each other in fundamental ways.35