Guía de certificaciones internacionales para Ecuador – ProEcuador

There is considerable literature on the linkage between finance and growth. Jefferis (1995) finds that the Botswana Stock Exchange (BSE) has had a major impact in mobilizing savings

15_{Chapter 3 provides an account on privatization sales in Africa for sample countries especially, in the last}

decade.

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from domestic institutional investors but has managed to attract little flows of foreign investment, and concluded that the activities of BSE might not have a significance impact on the performance of the economy. Singh (1992, 1997) found contradictory evidence: that stock market has little potential to foster long-term economic growth in most developing countries since they are associated with higher volatility. Hearn and Piesse (2010) also found that small stock exchanges’ impact on economic development is minimal due to poverty and inequality constraints faced by domestic investors in Africa.

King and Levine (1992) provided a genesis of the research on the linkages that might exist between financial development and economic growth. They used four financial indicators in their research namely: ratio of M1 to GDP (financial depth), ratio of liquid assets of the banking system to GDP, ratio of quasi-liabilities of the financial system to GDP and ratio of claims on the private sector by central bank and deposit money bank to GDP. The main findings of the study were that investment share of GDP and efficiency of investment (resource use) are major channels that matter for growth (see also King and Levine, 1993). Similarly, Minier (2003) found that the relationship between stock market and economic development may be different in countries with smaller stock markets. The research used the split regression method to divide low and high capitalization countries into two distinct groups. The relationship between stock market and economic development was found to be positive for high capitalization countries and negative for low capitalization countries.

Levine and Zervos (1996) found that stock market is positively correlated with long-run growth for a selected pooled cross-country analysis. They suggested that more research was necessary to identify policies that will aid sound securities market development and also explore the channels through which stock market improves growth outcomes. Harris (1997) provides evidence of a weak relationship between the level of stock market activity and growth in per capita output. The research shows that the relationship is weaker for developing countries than for developed countries.

The study by Rajan and Zingales (1998) discovered some interesting fresh ideas based on industrial level impact of financial development. Their evidence developed a new methodology that shows that financial development can foster growth in industries that are

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financial dependent17 and can also lead to emergence of new firms. Further evidence on the mechanisms by which financial development18 can result in economic development was provided by Ang (2008b). In his study of Malaysia, he found that financial liberalization has a negative impact on financial development and hence it can retard economic growth. The main contribution of his study to the literature is the provision of the qualitative and quantitative channels that link financial development and economic growth. Savings and investment behavior were found to be the main channels that promote financial development impacts on economic growth. His study however did not investigate the role of stock market in promoting economic development.

Ang (2008a) provides an overview of the theoretical and empirical evidence on the relationship between financial development and economic growth. The main contribution of his work to the main body of literature on finance and growth is the recognition of the multiplicity of roles of financial institutions such as that of: reducing risks, exercising corporate control, facilitating business transactions through credit facilities and guaranteeing payments. Financial markets however, can also play a major role in privatization of state owned enterprises and also in facilitating successful mergers and acquisition transactions on top of the other traditional roles of mobilizing savings for productive projects.

Durham (2002) provides evidence that the impact of stock market development on economic development differs across countries depending on countries’ initial income level, credit risk, and development of legal environment. His findings suggest that the stock market has a deleterious effect on economic development until a country attains a threshold income and legal infrastructure development19. This finding justifies the necessity to embark on a research for African countries whose levels of development in income and legal infrastructure are comparable to a certain degree.

17 _{Financial dependent industries are capital- and high-technological-intensive industries.} 18

Financial development was limited to banking sector development in Ang (2008)’s study.

19 _{There is a necessity for more research on the contribution of stock markets at early stages of economic}

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The evidence highlighted above seems to support a key argument that there is a positive relationship between stock market development and economic growth. What is not so clear- cut is the mechanism that links the two? The current study seeks to fill this gap by exploring the policies that can make existing African frontier markets work better and also explore the channels that link stock market development and economic development. These specific objectives are formalized in Chapter 4 and 5.