Teacher Svirskyy V. S.
Ternopil National Economic University, Ukraine
Financial
Aspects of Economic Growth
Finance has a close
intercommunication with economic processes in a country. Being the instrument
of division and redistribution of GDP, finance can stimulate as well as impede
economic growth. Economists have been discussing the role of the financial
sector in the economic growth for almost two centuries and their thoughts have
not always characterized by complete agreement. Since the earliest arguments pointing
the finance-growth nexus were brought forward (Bagehot [1]; Bunge [2]; Schumpeter
[3]; Yangul [4]), a huge amount of theoretical, historical and empirical researches
have appeared (see survey of this literature Svirsky [5]). In the earlier literature,
there were significant disagreements in economists’ views on the nexus between
finance and growth. On the one hand, J. Robinson [6] and Nobel Laureate R. Lucas
[7] consider that finance does not cause growth. On the other hand, another Nobel
Laureate M. Miller argues that the finance-growth nexus is “…too obvious for
serious discussion” [8]. Nowadays economic scientists came to the consensus about
the impact of finance on economic growth. Nobel Laureate J. Stiglits famously
argues that “We have come a long way since the time
when many viewed the financial system simply as a sideshow, or a passive
channel that allocated scarce resources to the most efficient uses. Today,
almost everyone agrees that the financial system is essential for development.
Improving the financial system can lead to higher growth…” [9].
The positive impact of the financial sector on
accelerating growth is achieved through a number of specific tasks and
functions that the financial sector performs. Functions specify what must financial
systems do and tasks represent what exactly it does. The main tasks of
financial systems performance are:
1. Mobilization and
accumulation of financial resources. Usually some economic agents have not enough of their own financial resources to undertake investments themselves. Simultaneously,
other part of economic agents has temporally free
capitals and can invest them. But the problem is that these capitals separately
are very small and have to be pooled before investing. The financial system has
to solve this problem by agglomerating capital from many smaller savers. In
other words financial system has to mobilize all potential resources to finance
economic growth.
2. Allocating capital
and monitoring investments. It is obvious, that
mobilization of financial resources is not the end in itself. Thus, the
financial system must provide its investing and effective use.
In addition these resources have to be backed to their owners with a profit.
3. Optimal division
and redistribution of GDP. The financial system has to guarantee the optimal
division and redistribution of GDP to satisfy the requirements of all economic
agents – government, enterprises and households.
The implementation
of above mentioned tasks depends on financial functions providing by financial
system: intercessory, informative, providing of liquidity and management of
risks.
Intermediation is a
key function of financial system. It would be very difficult to implement tasks
of financial systems performance without this function. Mobilization and
accumulation of financial resources, allocating capital and monitoring investments can be provided by the
intercession of the different parts of financial system: state finance,
financial sector or corporate finance. In an administrative economy a key role
in the transformation of savings into investments was played by the state. The considerable share of national
income was centralized in a budget. In the conditions of market economy the
financial sector (banking system and non-bank financial institutions) plays the
major role in this intermediation. The state gets only a small part of national
income by its redistribution.
It is obvious that
transformation savings into investments is possible even without financial
system. However frequently it is not only inadvisable but impossible. For
example, individual entrepreneurs seldom have an
adequate amount of their own financial recourses to undertake investments
themselves. Individual savers, without pooling their money, would not be able
to take benefit of the potential increasing returns to scale of their
investments, and would face a large level of risk with slight liquidity. That’s
why we need the financial system which resolves these problems by agglomerating
capital from many smaller savers, allocating capital to the most effective
uses, and monitoring to guarantee that it is being used well. Simultaneously,
the financial system reduces risk, increases liquidity, and conveys information
[9].
Any financial
relations are related to the risks. Financial systems help mitigate the risks
linked with individual projects, firms, industries, regions, and countries. Ability
of the financial system to manage these risks largely affects the acceleration
of rates of economic growth by improving resource allocation and encouraging
savings. It is evident that individual investors will chose investments with
the less degree of risk. Consequently, it doesn’t promote investments in
growth-enhancing innovative activities, because they are very risky. These
risks go down substantially, when the process of transformation savings into
investments takes place by the intercession of the financial intermediary. Even
in the case of bankruptcy of borrower (issuer) the loss for separate individual
savers will not be perceptible, because the risk of investment is diversified
between plenty of depositors of financial institute and losses will be
recovered by profits from other investments of this financial intermediary.
Providing of
liquidity is also an important function of the financial system which has a
direct influence on the acceleration of economic dynamics. Liquidity is the
cost and speed with which economic agents can convert financial instruments
into purchasing power at agreed prices. The typical link between liquidity and economic
growth arises because some high-return projects require a long-run pledge of
capital, but savers do not like to abandon control of their savings for a long
period. Therefore, if the financial system does not strengthen the liquidity of
long-term investments, less investment is likely to occur in the high return innovative
and risky projects. With liquid capital markets, savers can hold liquid assets
that they can quickly and easily sell if they seek access to their savings. At
the same time, capital markets transform these liquid financial instruments
into long-term capital investments.
Individual savers
face high costs of acquiring and processing information possible profitable
investments. It could prevent capital from flowing to its best uses. Financial
system produces information about possible investments and allocating of
capital, reduces information costs (through specialization and economies of
scale) and also helps identify the best production technologies and
entrepreneurs ideas. Thus, it improves resource allocation and accelerates
economic growth.
Bibliography:
1.
Вagehot, W. (1873), Lombard Street: A Description of the Money Market http://socserv2.mcmaster.ca/~econ /ugcm/3ll3/bagehot /lombard.html.
2.
Бунге: сучасний дискурс/За
ред. В.Д. Базидевича. – К.: Знання, 2005. – 697 с.
3.
Шумпетер И. Теория
экономического развития. – М.:Прогресс, 1982. – 455 с.
4.
Янжул И.И. Основные начала финансовой науки.
Учение о государственных доходах. – М.: «Статут», 2002. – 555 с.
5.
Свирский
В. С. Финансовая система как катализатор экономического роста: обзор основных
научно-теоретических концепций и эмпирических результатов / Инновационное
развитие современных социально-экономических систем: материалы международной
научно-практической конференции (г. Комсомольск-на-Амуре 2009 г.): В 2 ч. Ч. 2
/ Редкол.: В.В. Летовченко (отв. ред.) и др. – Комсомольск-на-Амуре: ГОУВПО
«КнАГТУ», 2009. – С. 10-14.
6.
Robinson, J. (1952) “The Generalization of the
General Theory.” In The Rate of Interest and Other Essays. London: MacMillan.
7.
Lucas, R. (1988), “On the Mechanics of Economic Development”, Journal of
Monetary Economics, № 22, 3-42.
8.
Miller, M. (1988) “Financial Markets
and Economic Growth.” Journal of Applied Corporate Finance № 11 (5): 8−15.
9.
Stiglits J. (1998) “The Role of the Financial System in Development” http://econ.worldbank.org/W... html.