سهم بخش های بازار مالی در مراحل مختلف توسعه: انتقال، انسجام و اقتصاد بالغ

What is the impact of financial sector segments at different stages of development? We apply a production function approach to investigate the impact of the credit, bond and stock segments in nine EU-accession countries over early years of transition (1996–2000) and compare these to mature market economies and to countries at intermediate stage. We find that the transfer mechanisms differ over the development cycle (from bond markets to educational attainment to labor participation) and that financial market segments with links to the public sector (but not stock markets) contributed to stability and growth in transition economies.

Over the last decade the role of financial sector development in economic growth has become a major topic in empirical research. Levine and Zervos (1998), for example, examine whether banking sector or capital market development are key for fostering growth for a sample of 44 countries over the 1976–1993 period. Most cross-section oriented studies (among others Rousseau and Wachtel, 2005, Levine et al., 2000, Singh et al., 2000 and Demirgüc-Kunt and Levine, 1999) base their analyses on such broad samples of industrial and developing countries. Most of them come to the conclusion that there is a positive interrelation between financial development and economic growth. But as Ahmed (1998) argues with respect to bank development: “[…] there are reasons to expect that […] the effect of bank development on growth may not be the same in magnitude in developing countries and industrial economies […]. Thus due to country aggregation we cannot answer interesting questions such as: how do the effects of banking development in a country such as the United States differ from those in Zimbabwe, say?” Do interactions between real activity and the financial stance, e.g. to aggregate shocks, differ between emerging and mature market economies (Jacobson et al., 2005)? A recent study by Rousseau and Wachtel (2005) also shows that the analysis of a possibly different impact of finance on growth in different countries and different periods becomes increasingly important. They find that the nexus between finance and growth seems to be significant for middle income countries (between 3000 and 12,000 USD per capita), but not for low income and high income countries. In addition, if countries are grouped according to the relative development of their financial sectors they find evidence for positive and significant effect on growth only for the group of countries in the middle range (countries with M3 to GDP ratios between 45 and 60%). Rousseau and Wachtel (2005) conclude that: “[…] the correlations between finance and growth found in cross-country data may well reflect differences in country characteristics rather than any dynamic cause–effect relationship from finance to growth.” Rousseau and Wachtel (2005) call for more studies on individual countries’ experiences and the relationship between finance and growth. Picking up these thoughts, our paper addresses two research questions: First, has financial development played a significant role for stability and growth performance of “emerging market” transition and accession countries in Central and Eastern Europe (CEE)? Second, do different financial segments (i.e. banking intermediation, stock markets, bond markets) affect stability and economic development differently in these countries? Thus, we hope to find out which form of domestic finance is most efficient in terms of inducing stability and growth and why. With regard to EU-enlargement the examination of those research questions may be of special relevance for securing long-term growth and stability of new EU-member states and accession countries and in speeding up real convergence to the EU. We use a production function approach to investigate the impact of financial market segments on economic development and stability in nine EU-accession countries (AC)1 over early years of transition (1996–2000) i.e. during the “market-enabling” respectively “market deepening” phase (EBRD, 2007). We then compare these to mature market economies2 and to a group of countries at intermediate stage of development – the EU cohesion countries receiving structural fund support (SFC).3 While much of the literature uses the ratios to GDP of liquid liabilities (M3), liquid liabilities less narrow money (M3 less M1) and private credit, we develop this approach further and investigate the impact of the various financial market segments. We contribute by (1) first using an aggregate measure of financial development covering credit, bond and stock markets, which is less influenced by differences in financial market structures between countries, and changes of financial market structures within countries. We then (2) analyse the causal links between single financial market segments and economic development in order to determine interdependencies between the structure of financial markets and economic growth, an issue rather ignored by the literature so far. Methodologically, we rely on a panel data approach. As for the specification of growth regressions, we follow the standard approach by Mankiw et al. (1992), who use physical capital stock, labor, and human capital as explanatory variables of economic growth. We add different financial market variables: two different measures of total financial intermediation, domestic credit, private credit, stock market capitalization and bonds outstanding. Such extensions of a standard growth model are the most common approach in the literature. Our results suggest that domestic bank credit and bond markets together with real capital stock growth stimulate economic growth in early transition. With progress in cohesion, domestic credit turns out insignificant, while educational attainment becomes the next important factor along with real capital accumulation and bond markets that contribute to economic growth. For the group of the developed countries, none of the financial variables played an important role for growth over the period considered, but labor participation turned out to be significant along with real capital accumulation and educational attainment. For the accession countries, we find that one measure of overall financial sector development (i.e. domestic credit expansion) and one single segment of the financial sector (i.e. bond markets) stimulate economic growth and thus enhance economic stability over early years of transition. Without a proper legal, institutional and corporate governance framework, the stock market may have introduced rather instability to the financial sector than have contributed to economic growth in the early phase of transition (ECB, 2006). In contrast to earlier studies in other regions (e.g. Atje and Jovanovic, 1993 and Levine and Zervos, 1998), we find no significant influence of private credit and stock markets on growth for accession countries. As for the other growth determinants, real capital stock growth turned out to be an important factor contributing to economic development, while labor participation and educational attainment did not play a significant role. We conclude that transfer mechanisms for growth and stability differ over the development cycle. The results indicate a clear distinction between the growth effects of the financial funds channeled to/through the public sector and those directed to the private sector at this stage of development. It turns out that in order for the private sector to be more effective in promoting growth and stability, different potential obstacles need to be removed as identified in the literature and in this paper. The results are especially relevant in the context of EU enlargement, i.e. for securing rapid development and real convergence of new EU-member states, but also of other accession countries and emerging markets. The remainder of the paper is organized as follows. Section 2 briefly reviews the selected empirical literature that deals with the nature of the finance–growth link in accession countries. Section 3 discusses some methodological issues for empirical research and states the econometric model. Section 4 analyzes summary statistics of data and gives an overview of the econometric results. In the fifth section the results are discussed and interpreted.

While much of the literature is concerned with impact of the financial sector at large on economic stability and growth, we examine the influence of financial market segments (credit, bond, stock) and whether this influence varies across different stages of economic development. By applying a panel data approach to 9 transition countries, 5 structural fund (cohesion) countries at intermediate stage of development, and 13 mature market economies for the 1996–2000 period, we find that the transfer mechanisms differ over the stages of development, going from (public-sector-driven) bond markets in accession countries to educational attainment in intermediate (cohesion) countries to labor participation in mature market economies. Unlike in transition economies, where domestic bank credit and bond markets together with real capital stock growth seem to have stimulated economic growth in early transition, the role of financial markets for growth, as well as the other sources of growth in mature market economies were quite different. In addition, there are considerable differences between the results for the group of developed countries and for the cohesion (structural fund) countries. For the latter group of countries, domestic credit turns out insignificant, while educational attainment becomes the next important factor along with real capital accumulation and bond markets that contribute to economic growth. For developed economies, none of the financial variables played an important positive role for growth over the period considered. Moreover, domestic and private credit were significant, but negative determinants of growth. As for the other variables, labor participation turned out to be important, with the expected positive sign, along with real capital accumulation and educational attainment. These results indicate that the financial sector can support stability and growth in transition countries, at least in the short run. However, our findings about the role of different sectors of the financial markets deviate from the expectations that free stock markets are a major driver of economic development: bond markets and total domestic credit expansion – both of which include public finance – stimulated economic growth in our sample, whereas private credit and stock market capitalization (i.e. solely private finance) had no significant influence on growth during the early years of transition. Stock market reforms without the proper institutional and corporate governance framework may have introduced a dose of instability hampering contributions to growth. For transition economies, financial funds channeled through the combination of public and private sectors seem to provide stronger growth triggers than those channeled solely through the private sector in the intermediate stage of development. In emerging markets bond markets may play a far more important role than hitherto assumed. As foreign direct investment plays a more prominent role for private finance in transition economies compared to established market economies, its role also needs renewed attention. Possible obstacles hindering private credit and stock markets to exploit their full potential and contribute to both stability and growth need to be explored further. A main reason for mixed effects of private finance in transition economies seems to be that efficient government policies, which channel funds from financial markets into infrastructure investment, can provide a significant stimulus to economic growth in the intermediate phase of transition. As long as corporate governance in the private sector is weak, the risk of financial investment into the private sector may be considered to be far too high and thus providing finance to an efficient state can be a major way to reasonably foster economic stability and growth during transition. While we are by no means saying that the private sector is unimportant for economic development in emerging markets, our findings support Rousseau and Wachtel (2005) in arguing that the widely accepted aggregate effect of finance on growth varies with the level of economic development and, therefore, country characteristics need to be considered. This draws renewed attention to the role of individual financial market segments and to specific effects of economic transition onto the ability of these segments to foster economic stability and growth in transition and emerging market economies.