Banks and Economic Growth: Implications from Japanese History
In the 1950s and 60s, Alexander Gerschenkron claimed that banks facilitate economic growth among "backward" countries. In 1990s and 2000s, many theorists similarly claim that banks promote growth. Banks do so by their superior monitoring and screening capabilities, they reason. Through those capabilities, banks reduce informational asymmetries and the attendent moral hazard and adverse selection, and thereby improve the allocation of credit. As a fast-growth but allegedly bank-centered economy, Japan plays an important part in these discussions of finance and growth. In early 20th century Japan firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that preferential access through their affiliated banks. With data from the first half of the century, we ask whether Japanese banks performed the roles Gerschenkron and modern theorists assign them. Notwithstanding the usual accounts, we find that they did not. Japan was not a bank-centered economy; instead, firms relied overwhelmingly on equity finance. It was not an economy where firms with access to bank credit outperformed their rivals; instead, firms earned no advantage from such access. And it was not a world where the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more (if any) than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.
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