IDEAS home Printed from https://ideas.repec.org/a/wly/iecrev/v54y2013i2p629-663.html
   My bibliography  Save this article

Financial Development And The Sources Of Growth And Convergence

Author

Listed:
  • Oleg Badunenko
  • Diego Romero‐Ávila

Abstract

We extend the deterministic, nonparametric production frontier framework by incorporating financial development. Our analysis convincingly shows that (1) failure to account for financial development overstates the role of physical capital accumulation in labor productivity growth, (2) most of this overstated contribution stems from the efficiency‐enhancing role of well‐functioning financial institutions, (3) international polarization is solely driven by efficiency changes, and (4) increased distributional dispersion of productivity is primarily driven by technological change. Model’s extensions to account for the growth effect of changes in the institutional environment only add to the argument about the overstated role of physical capital.

Suggested Citation

  • Oleg Badunenko & Diego Romero‐Ávila, 2013. "Financial Development And The Sources Of Growth And Convergence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 629-663, May.
    • Handle: RePEc:wly:iecrev:v:54:y:2013:i:2:p:629-663
    DOI: iere.12009
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/iere.12009
    Download Restriction: no
    File URL: https://libkey.io/iere.12009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
    2. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
    3. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 535-568.
    4. Devereux, Michael B & Smith, Gregor W, 1994. "International Risk Sharing and Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-550, August.
    5. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 83-116.
    6. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    7. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    8. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
    9. Galetovic, Alexander, 1996. "Specialization, intermediation, and growth," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 549-559, December.
    10. Jang-Sup Shin, 2011. "Finance and Economic Development in China: An Introduction," Global Economic Review, Taylor & Francis Journals, vol. 40(2), pages 141-143.
    11. Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
    12. Quah, Danny T, 1996. "Twin Peaks: Growth and Convergence in Models of Distribution Dynamics," Economic Journal, Royal Economic Society, vol. 106(437), pages 1045-1055, July.
    13. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-751, August.
    14. Stijn Claessens & Luc Laeven, 2003. "Financial Development, Property Rights, and Growth," Journal of Finance, American Finance Association, vol. 58(6), pages 2401-2436, December.
    15. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    16. Quah, Danny, 1997. "Empirics for growth and distribution," LSE Research Online Documents on Economics 2138, London School of Economics and Political Science, LSE Library.
    17. Quah, Danny, 1996. "Twin peaks : growth and convergence in models of distribution dynamics," LSE Research Online Documents on Economics 2278, London School of Economics and Political Science, LSE Library.
    18. 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.
    19. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    20. Chakraborty, Shankha & Ray, Tridip, 2006. "Bank-based versus market-based financial systems: A growth-theoretic analysis," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 329-350, March.
    21. Levine, Ross, 1991. "Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
    22. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    23. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross‐Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    24. Galor, Oded, 2005. "From Stagnation to Growth: Unified Growth Theory," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 4, pages 171-293, Elsevier.
    25. José M. Liberti & Atif R. Mian, 2010. "Collateral Spread and Financial Development," Journal of Finance, American Finance Association, vol. 65(1), pages 147-177, February.
    26. Subodh Kumar & R. Robert Russell, 2002. "Technological Change, Technological Catch-up, and Capital Deepening: Relative Contributions to Growth and Convergence," American Economic Review, American Economic Association, vol. 92(3), pages 527-548, June.
    27. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
    28. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
    29. Psacharopoulos, George, 1994. "Returns to investment in education: A global update," World Development, Elsevier, vol. 22(9), pages 1325-1343, September.
    30. Alexander Galetovic, 1996. "Specialization, Intermediation, and Growth," Documentos de Trabajo 1, Centro de Economía Aplicada, Universidad de Chile.
    31. Daniel J. Henderson & R. Robert Russell, 2005. "Human Capital And Convergence: A Production-Frontier Approach ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1167-1205, November.
    32. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law, endowments, and finance," Journal of Financial Economics, Elsevier, vol. 70(2), pages 137-181, November.
    33. David W Edgington & Roger Hayter, 2000. "Foreign Direct Investment and the Flying Geese Model: Japanese Electronics Firms in Asia-Pacific," Environment and Planning A, , vol. 32(2), pages 281-304, February.
    34. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    35. Danny Quah, 1997. "Empirics for Growth and Distribution," CEP Discussion Papers dp0324, Centre for Economic Performance, LSE.
    36. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
    37. Raymond Fisman & Inessa Love, 2004. "Financial Development and Intersectoral Allocation: A New Approach," Journal of Finance, American Finance Association, vol. 59(6), pages 2785-2807, December.
    38. Philippe Aghion & Steven Durlauf (ed.), 2005. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 1, number 1.
    39. Quah, Danny T, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," Journal of Economic Growth, Springer, vol. 2(1), pages 27-59, March.
    40. Quah, Danny T, 1996. "Convergence Empirics across Economies with (Some) Capital Mobility," Journal of Economic Growth, Springer, vol. 1(1), pages 95-124, March.
    41. Danny Quah, 1996. "Twin Peaks: Growth and Convergence in Models of Distribution Dynamics," CEP Discussion Papers dp0280, Centre for Economic Performance, LSE.
    42. Virgiliu Midrigan & Daniel Yi Xu, 2014. "Finance and Misallocation: Evidence from Plant-Level Data," American Economic Review, American Economic Association, vol. 104(2), pages 422-458, February.
    43. Hulten, Charles R & Wykoff, Frank C, 1996. "Issues in the Measurement of Economic Depreciation: Introductory Remarks," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 10-23, January.
    44. Bencivenga Valerie R. & Smith Bruce D. & Starr Ross M., 1995. "Transactions Costs, Technological Choice, and Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 67(1), pages 153-177, October.
    45. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    46. Diewert, W E, 1980. "Capital and the Theory of Productivity Measurement," American Economic Review, American Economic Association, vol. 70(2), pages 260-267, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    2. Oleg Badunenko & Daniel Henderson & R. Russell, 2013. "Polarization of the worldwide distribution of productivity," Journal of Productivity Analysis, Springer, vol. 40(2), pages 153-171, October.
    3. Barnabé Walheer, 2016. "Multi-Sector Nonparametric Production-Frontier Analysis of the Economic Growth and the Convergence of the European Countries," Pacific Economic Review, Wiley Blackwell, vol. 21(4), pages 498-524, October.
    4. Walheer, Barnabé, 2016. "Growth and convergence of the OECD countries: A multi-sector production-frontier approach," European Journal of Operational Research, Elsevier, vol. 252(2), pages 665-675.
    5. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    6. Henderson, Daniel J. & Tochkov, Kiril & Badunenko, Oleg, 2007. "A drive up the capital coast? Contributions to post-reform growth across Chinese provinces," Journal of Macroeconomics, Elsevier, vol. 29(3), pages 569-594, September.
    7. Walheer, Barnabé, 2018. "Labour productivity growth and energy in Europe: A production-frontier approach," Energy, Elsevier, vol. 152(C), pages 129-143.
    8. Nicholas Apergis & Christina Christou & Stephen Miller, 2012. "Convergence patterns in financial development: evidence from club convergence," Empirical Economics, Springer, vol. 43(3), pages 1011-1040, December.
    9. Fung, Michael K., 2009. "Financial development and economic growth: Convergence or divergence?," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 56-67, February.
    10. Paul Johnson & Chris Papageorgiou, 2020. "What Remains of Cross-Country Convergence?," Journal of Economic Literature, American Economic Association, vol. 58(1), pages 129-175, March.
    11. Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
    12. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    13. Xavier Sala-i-Martin, 2002. "15 Years of New Growth Economics : What Have we Learnt?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(2), pages 5-15, August.
    14. Oleg Badunenko & Daniel J. Henderson & Valentin Zelenyuk, 2008. "Technological Change and Transition: Relative Contributions to Worldwide Growth During the 1990s," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(4), pages 461-492, August.
    15. Alberto Bucci & Simone Marsiglio, 2019. "Financial development and economic growth: long‐run equilibrium and transitional dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(3), pages 331-359, July.
    16. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    17. Ferreira Paulo & Dionísio Andreia, 2016. "GDP growth and convergence determinants in the European Union: a crisp-set analysis," Review of Economic Perspectives, Sciendo, vol. 16(4), pages 279-296, December.
    18. Jesús Peiró-Palomino, 2016. "European regional convergence revisited: the role of intangible assets," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 57(1), pages 165-194, July.
    19. Beck, T.H.L., 2011. "The Role of Finance in Economic Development : Benefits, Risks, and Politics," Discussion Paper 2011-141, Tilburg University, Center for Economic Research.
    20. Trunin, Pavel (Трунин, Павел), 2015. "Analysis of the Level of Development of the Financial System in the Russian Federation [Анализ Уровня Развития Финансовой Системы В Российской Федерации]," Published Papers mn38, Russian Presidential Academy of National Economy and Public Administration.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:iecrev:v:54:y:2013:i:2:p:629-663. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.