Business Finance in Less Developed Capital Markets

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

CONCLUSION

This chapter describes a theory of securities market development to promote economic growth. Financial-structure development is seen to be a necessary condition for economic growth. Specifically, the development of securities markets is seem to be necessary for the economy to progress to its final growth stages. The reinforcing feedback effects between the securities markets and the real economy propel the latter to higher growth levels.

Undoubtedly there are costs of promoting securities markets, but the overall benefits are believed to outweigh the costs. While the theory in its entirety does not yield a testable hypothesis, the final two stages do permit empirical verification. At the very minimum, it is possible to test whether the characteristics of securities markets in developed and developing nations are sufficiently distinct to differentiate between them.


NOTES
1.
A broad definition of capital markets includes the entire organized financial system, covering commercial banks and all other financial intermediaries as well as short-term and long-term primary and nonmonetary financial claims. A definition at the intermediate level includes all organized markets and institutions dealing in long-term instruments only, such as equities, bonds, term loans, mortgages, time and savings deposits, and so on. The narrowest definition includes organized markets dealing in stocks, bonds, and convertibles, using the services of brokers and dealers. For further details, see Wai and Patrick ( 1973).
2.
For example, in the United States, deposits up to $100,000 with commercial banks are insured by the Federal Deposit Insurance Corporation ( FDIC).
3.
Much of the following description draws heavily from Rostow ( 1960) celebrated "stages of growth" concept.
4.
See Drake ( 1977), p. 84.
5.
Ibid., p. 85.

REFERENCES

Cho Y. J. ( 1986). "Inefficiencies from Financial Liberalization in the Absence of Well- functioning Equity Markets." Journal of Money, Credit, and Banking 18, no. 2: 191-199.

Drake P. J. ( 1977). "Securities Markets in Less-developed Countries." Journal of Development Studies 2 (January): 73-91.

Goldsmith R. W. ( 1958). Financial Intermediaries in the American Economy Since 1900. Princeton, N.J.: Princeton University Press.

-----. ( 1969). Financial Structure and Development. New Haven, Conn.: Yale University Press.

-----. ( 1983). The Financial Development of India, Japan, and the United States. New Haven, Conn.: Yale University Press.

Kaldor N. ( 1955). "Alternative Theories of Distribution." Review of Economic Studies 23: 83-100.

-64-

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