Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview

3
Securities Market Development and Economic Growth

P. C. KUMARand GEORGE TSETSEKOS

The financial-sector-economic-growth nexus has not yet gained wide currency among academicians and policymakers. However, consequent to the works of Goldsmith ( 1958, 1969, 1983), McKinnon ( 1973), and Shaw ( 1973), it is generally accepted that financial-structure development is a necessary condition for economic growth. The objective of this chapter is to develop a theory of securities market development and economic growth. Its thrust is that beyond a certain stage of growth, financial intermediation is more efficient, paralleled by resource- allocation efficiencies, with securities markets than with banks. Mutually reinforcing feedback effects between securities markets and the real economy exist that propel the latter to higher levels of growth. Undoubtedly, there are costs associated with securities market development, but when the costs are considered jointly with the benefits produced, securities markets are more efficient. However, it should be stressed that securities market development should be considered only at a particular phase in the development sequence. At any other phase, the costs are likely to outweigh the benefits.

The first section of the chapter provides a historical perspective and a literature review. The second section presents a discussion of substitutes and complements in the financial structure. The theory of securities market development and economic growth is presented in the third section. The final section presents some concluding remarks.


FINANCIAL-STRUCTURE DEVELOPMENT AND ECONOMIC GROWTH: HISTORICAL PERSPECTIVE AND LITERATURE REVIEW

The financial-development-economic-growth nexus has not been accorded prominence in the literature either in economics or in finance. The classical Harrod

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