Financial Development On Economic Growth Mechanism

As the development of financial system should be taken into consideration of the local institutional environment and the constraining conditions, the effectiveness of the finance-growth mechanism can not be interpreted without addressing the stage of financial and economical development. Although the financial development could spur economic growth, the causes, the forms and the mechanism may be significantly different.On theoretical level, the Schumpeter paradigm endogenous growth theory provides a more general analysis framework to the study of the financial development and the economic growth by incorporating the "creative destruction" into the model, and thus paving the way for the analysis of the structural and institutional determinants of the prolonged innovation. From this approach, we propose the stage hypothesis in the finance-growth mechanism, which combines the quantity and quality channel with the stage of economic growth development on the basis of the inherent dynamic characteristics of the economic growth:(1) On the connotative and manifestation level. The quantitative mechanism's predominant representation is the capital accumulation channel, in which the financial development promotes the economic growth mainly through mobilizing savings, ironing the endowment shock, and improving capital efficiency. It has two dimensions on the type of capital accumulation:intension and extension. The qualitative mechanism primary assumes the forms of promoting the economic growth through the technical progress and the macro-efficiency in three aspects. Firstly, by improving the technology absorptive capacity, the financial development could facilitate the technology spillovers and the utilization of the late-development advantages. Secondly, by promoting the R&D project selection, financing, and supervision, the financial development could boost the research and development. Thirdly, the financial development hastens the cultivation and formation of the entrepreneurship, which is the subject of the technology improvement.(2) On the relevant policies level. The quantitative mechanism could enhance rapid capital accumulation and thus economic growth under the governmental implicit credit guarantee. Conversely, the effectiveness of the qualitative mechanism depends on the reduction of the excessive government interventions and the deregulation of the financial repression policies. Otherwise, the absence of the entrepreneurship and the factors which hinder the process and the transformation of the innovation could obstruct the qualitative mechanism.Using the data from the World Bank, International Monetary Fund, the World Intellectual Property, the dissertation empirically made analysis of the high income and low income countries from 1985 to 2009, and the China's provincial panel data as well. The results not only support the Schumpeter's views on the convergence the financial development might have on the economic growth, but also verify the hypothesis as proposed.The factors, such as the endowments, the level of technological development, and the economic growth, which might have significant impact on the variables in the model, have to be considered before refereeing the western mature theories. The same is true of the financial system reform. China's earlier governmental policies focused on the effective control of the financial system, which proved to be effective to achieve a rapid capital accumulation and the economic growth through the quantitative mechanisms. While with the tendency moving towards the frontier of the technology, some adjustment of the policies needs to be made accordingly in order to promote the effectiveness of the qualitative mechanism with the sustained and steady economic growth. Specifically, on the incentive level, it is needed for shifting from the mobilization to the allocation of financial resources. On the ability level, it is needed for incorporation of the technological innovation, imitation, absorption, and re-innovation. On the coordination level, it is needed for institutional supports for the reform, particularly in the reformation of the present infrastructure construction and the bank stability, as the effectiveness of the finance-growth mechanism could be elevated by improving the institutional environments, business environments and the financial stability.