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The missing link: the finance-growth nexus and the Guyanese growth stagnation

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  • Khemraj, Tarron

Abstract

The theory underpinning financial liberalization postulates that unregulated financial markets are growth-augmenting. Guyana has been a model reformer since 1988, implementing market-friendly policies. Growth performance, however, has been subdued. This paper argues that natural entry barriers necessitate an oligopolistic banking structure, which follows a mark-up threshold loan interest rate rule at which business credit is constrained. Empirical validation of the mark-up loan rate comes from a bank excess liquidity preference curve that is horizontal at the high threshold rate. Moreover, the flat curve signifies that non-remunerated excess liquidity and interest paying business loans are perfect substitutes at the threshold loan rate. Once business credit is restricted, banks hold excess liquidity and/or foreign assets. Therefore, the Guyanese economy has evolved from a regime of government financial repression to private oligopoly bank stagnation; hence the missing link connecting finance and growth.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16342.

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Date of creation: Oct 2007
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Publication status: Published in Social and Economic Studies 3&4.57(2008): pp. 105-129
Handle: RePEc:pra:mprapa:16342

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Keywords: Financial liberalization; growth; oligopoly interest rate;

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References

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  1. Khemraj, Tarron, 2007. "Monetary policy and excess liquidity: the case of Guyana," MPRA Paper 53126, University Library of Munich, Germany.
  2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  3. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  4. Khemraj, Tarron, 2008. "Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana," MPRA Paper 53127, University Library of Munich, Germany.
  5. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  6. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander, 2000. "The credit crunch in East Asia : what can bank excess liquid assets tell us ?," Policy Research Working Paper Series 2483, The World Bank.
  7. Claessens, Stijn & Laeven, Luc, 2005. "Financial dependence, banking sector competition, and economic growth," Policy Research Working Paper Series 3481, The World Bank.
  8. Judith Gold & Ruben Atoyan & Cornelia Staritz, 2007. "Guyana," IMF Working Papers 07/86, International Monetary Fund.
  9. Xavier Vives, 2001. "Competition in the Changing World of Banking," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 535-547.
  10. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
  11. Chang, Ha-Joon & Park, Hong-Jae & Yoo, Chul Gyue, 1998. "Interpreting the Korean Crisis: Financial Liberalisation, Industrial Policy and Corporate Governance," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 735-46, November.
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Cited by:
  1. constantine, collin, 2013. "Why Guyana's self discovery is the missing link in its development strategy," MPRA Paper 44205, University Library of Munich, Germany.
  2. Khemraj, Tarron, 2013. "Bi-communalism and the economic origins of democracy: a case study," MPRA Paper 47288, University Library of Munich, Germany.
  3. Grenade, Kari & Pasha, Sukrishnalall, 2012. "Accelerating Guyana’s Growth Momentum," MPRA Paper 41960, University Library of Munich, Germany.
  4. Williams, Joycelyn, 2012. "Beyond Macroeconomic Stability: The Role of Selective Interventions in Guyana’s Growth," MPRA Paper 42755, University Library of Munich, Germany.
  5. Khemraj, Tarron & Hinova, Diana, 2011. "Elected Oligarchy and Economic Underdevelopment: The Case of Guyana," MPRA Paper 29733, University Library of Munich, Germany.

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