Some Recent Progresses on Financial Structure and Development

Financial structure differs greatly across countries. In bank-based financial systems such as in Germany, Japan (until a decade ago), and India, banks offer the main financial services in mobilizing savings, allocating capital, monitoring corporate managers, and providing risk management services.1 In market-based systems such as in the UK, the US, and Malaysia, both stock markets and banks play important roles in all financial services. What explains financial structure? Does the combination of institutions and markets that constitutes the financial system have any impact on economic development? These questions have fascinated economists for decades. One of the earliest attempts to address these questions was Goldsmith (1969), who 40 years ago tried to document the change of financial structure over time and to assess the impacts of financial development on economic development. He states that ‘one of the most important problems in the field of finance, if not the single most important one, almost everyone would agree, is the effect that financial structure and development have on economic growth’. With data from 35 countries for the pre-1964 period, he finds positive correlation between financial development and economic growth. But he could not go far on financial structure due to data constraints: he could only rely on careful comparisons of Germany and the United Kingdom. Obviously it is hard to extend the conclusions from case studies to the rest of the world.