程序代写案例-MGDI72162-Assignment 1
时间:2022-04-13
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MGDI72162
Contemporary Issues in Development Finance 2016/2017
Assignment 1 (100%)
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International Development: Globalisation, Trade and Industry
Word Count: 3463
Question:
Using data for 30 low income group countries and 30 middle/high
income countries investigate whether stock market development
leads to an increase in economic growth.
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Introduction
By stimulating specialisation in investment decision-making process, reducing investment
risk through higher liquidity, increasing incentives for information accumulation and
mobilisation of savings, stock markets should, in theory, have an effect on economic growth.
Despite strong theoretical foundation to support the impact of the stock markets on economic
growth, I argue that stock market development does not lead to economic growth after
measuring size and liquidity of the stock market in relation to the GDP growth. Although
liquidity is found to have more impact that the sheer size of the market, it is not enough to
support its effect economic growth given the weak correlation. Still, the evidence is not
sufficient enough to fully explain this complex linkage given strong methodological
limitations and lack of some key data on less-developed economies.
Access to finance is essential for private sector development leading to higher economic
growth assuming that a country provides capable entrepreneurial base, able to generate
satisfactory revenue. It is equally important in times when, for instance, there is a lack of
access to finance through other means, not enough foreign direct investment as a source of
private sector growth and/or given problems of publicly owned companies in business
activities. Financial intermediation through banks is more common in earlier phases of
development in developing countries, however, as financial structures evolve with economic
growth, they tend to provide more space to market-based financial activities, and to stock
markets in particular. The importance of stock market grows and functions evolve
accordingly, either supplementing or fully complementing role of the banks. In the market-
based system, banks and capital markets compete and/or collaborate to “facilitate effective
allocation and deployment of economic resources, both across boarders and across time in an
uncertain environment” (Merton and Bodie, 1995:12). Yet, regulatory and institutional
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arrangements differ across countries to such an extend that it is empirically difficult to assess
the whether the function of banks, of stock markets, functions of both, or neither of them is or
would be conductive to economic growth. This essay is going to focus both theoretically and
empirically on the importance of stock market development on long-run economic growth.
According to extensive theoretical literature, stock market development leads to economic
growth, which is also a key factor in poverty reduction. In the light of transaction cost
reduction and higher stock liquidity, which encourages higher returns on shares, stock market
development spurs specialisation in investment decisions. This specialisation is also closely
associated with innovation in financial software (eg. financial big-data and analytics systems)
and processes (eg. effective contracting systems in securities markets) that lead to better
resource allocation. Secondly, stock market development offers significant benefits by
spreading of investment risk. In fact, lenders can diversify their investment portfolio by
allocating their savings to shares with higher and lower levels of risk (Atje and Jovanovic,
1993). With accurate information provision, investors fear about the volatility or riskiness of
a stock can be resolved by quick and inexpensive investment withdrawal (Bencivenga, Smith
and Starr, 1996). Stock markets incentivise lenders to invest in long-term capital, which tends
to be riskier benefitting businesses with higher impact in the long-run. Indeed, information
provision motivated by increased investors incentives can lead to improvements in corporate
governance (Holmstrom and Tirole, 1993), for instance through mitigating the principal-
agent problem (Diamond and Verrecchia, 1982; Jensen and Murphy, 1990), alignment of
managers’ effort to those of owners through compensation provision accordingly to
performance and given the threat of corporate takeover (Levine, 1997). Indeed, acquisition
and dissemination of often costly information about firms is a healthy sign of transparent and
accountable private sector that may be attractive for foreign shareholders looking to diversify
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their portfolio internationally. Lastly, stock market development leads to mobilisation of
savings provided better information, reduction in transaction costs and given the safety and
the speed of investment withdrawal. However, this last aspect is rather controversial as some
scholars argue that higher investment returns actually lower the amount of savings (Arestis,
Demetriades and Luintel, 2001).
While theoretical evidence supports the view that stock market development brings benefits
that should eventually lead to economic growth in a convincing manner, empirical findings
draw a more blurred picture in this causal relationship. On the side of the argument in support
of the stock markets, scholars find significant correlation between stock market development
and long-term economic growth through cross-country growth regression analysis (Atje and
Jovanovic, 1993; Levine and Zervos, 1996a 1998b). Levine and Zervos go even further to
argue that given a large stock market liquidity in the early stages of development, there
would be significant increase in future rates of output growth, capital stock and productivity
growth (1998). Although they see both banking development and stock market development
as conductive to economic growth, they conclude that stock markets offer different services
than banks as they enter the regression significantly (ibid, 1996). Although less control for
other important economic, political and future factors is provided, Atje and Jovanovic (1993)
assess, using the same methods, not only find a strong impact of the stock markets as they see
the effects of banks to be insignificant in comparison to equity markets. This evidence
strongly opposes theories that assume financial services provided by banks better address
agency problems (Stiglitz, 1985). However, considering many econometric problems with
regards to cross-country regression methods, studies in favour of equity markets tend to
exaggerate its effects on economic growth (Arestis, Demetriades and Luintel, 2001).
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Following the criticism, the emphasis of these scholars is placed on the impact of banks on
economic growth (ibid, 2001).
Furthermore, it remains rather unclear whether banks or stock markets are more conductive
to economic growth in more developed financial structures considering the variety of
different institutional characteristics and circumstances as well as the inter-linkages between
their core functions. In fact, there is a strong evidence supporting the role of both equity
markets and banks in economic growth (Levine and Zervos, 1996a 1998b; Rajan and
Zingales, 1998; Levine and Carkovic, 2002). By utilising dynamic model GMM approach,
which reduces biases related to averaged-out results, endogeneity, omitted variables or
unobserved country-specific effects, the effects of both institutions positively affect economic
growth (Beck and Levine, 2002). Very little contradiction is also to be found theoretically as
stock market build up on the role of banks in most market-based financial systems, however,
most developing countries may never be able to reach that stage.
Thus, considering wide range of economies with different level of GDP per capita and GDP
growth applied in those studies, it calls for better empirical from developing countries. In
terms of theory, Singh (1997) and Harris (1997) suggest that stock markets may bring more
benefits for developed countries than developing one. Singh in particular emphasizes
problems with volatility and arbitrariness in the pricing process of stock markets in
developing countries (1997). Macroeconomic instability is likely to have an impact on capital
interaction between stock markets and foreign exchange markets, for instance, through
inflation, money supply and interest rates (Akyuz, 1993; Singh, 1997). Indeed, development
trajectory of developing countries relies too heavily on the external environment, affecting
regulatory regime of domestic banking system and the ability to develop desirable private
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sector involved in equity financing. Nevertheless, the amount of stock markets in less
developed parts is surging (Demirguoc-Kunt and Levine, 1996). For instance, there used to
be only eight stock markets across the African continent prior to 1989 (Yartey and Adjasi,
2007) but the number has actually grown to twenty-nine. This paper secondary aim is to
complement key empirical findings, providing evidence on the impact of stock market
development on long-run economic growth by utilising data on lesser developed economies.
Data and Measurement
This essay employs data on 60 countries in the period from 1993 to 2015. Those 60 countries
are divided into 30 low and lower-middle income income as well as 30 upper-middle and
high income1. To increase the reliability of the results, the sample is compiled with developed
countries that have rather less integrated equity markets. The effort to implement more least-
developed economies has not been possible due to the unavailability of the data. Indeed, the
unavailability of the data for more than 30% of this sample means on stock markets before
year 1993 means that only 23 years are covered. The term ‘long-run’ is still applicable but far
from perfect. The data for stock market measurements come from the World Federation of
Exchange database while GDP growth data are from World Bank and OECD National
Accounts data files. All indexes contain means-removed averaged data that may not fully
reflect on different stages of stock market development and their impact on economic growth.
These data should not be taken as fully accurate because of their statistical weaknesses
1 The full sample includes: 1. Malawi 2. Uganda 3. Zimbabwe (low-income) 4. Armenia 5. Bahrain 6. Barbados
7. Bolivia 8. Cote d’Ivoire 9. Egypt 10. El Salvador 11. Fiji 12. Georgia 13. Ghana 14. India 15. Indonesia
16. Moldova 17. Mongolia 18. Morocco 19. Namibia 20. Nigeria 21. Papua New Guinea 22. Paraguay
23. Philippines 24. Sri Lanka 25. Swaziland 26. Thailand 27. Tunisia 28. Uzbekistan 29. Vietnam 30. Zambia
(lower-middle income) 31. Argentina 32. Botswana 33. Brazil 34. Bulgaria 35. China 36. Croatia 37. Ecuador
38. Jamaica 39. Kazakhstan 40. Lebanon 41. Mexico 42. Montenegro 43. Panama 44. Peru 45. Romania 46
Russian Federation 47. South Africa 48. Turkey 49. Venezuela (higher-middle income) 50. Chile 51. Czech
Republic 52. Hong-Kong SAR, China 53. Hungary 54. Korea, Rep. 55. Oman 56 Poland 57. Qatar 58. Saudi
Arabia 59. Slovak Republic 60. Slovenia (high income)
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related to differences in accounting standards and prevalence of inaccurate reporting, even
more so in lesser developed countries.
This paper engages descriptive statistical analysis and utilises scatter plot which focuses on
three key characteristics of the stock markets functions, namely size, liquidity and integration
measured by market capitalisation, turnover ratio and the total value of stock traded ratio.
First, the size of the market is reflected in the market capitalisation, a measure of total value
of all listed shares. In line with Levine and Zervos (1996), the assumption is that the size of
the market is positively correlated with ability to diversify risk and to mobilise capital.
However, there are ways in which the stock market measures could be undermined. In fact, it
has been suggested the size of the equity markets is highly correlated with bank credit(Levine
and Zervos, 1998). Indeed, a strong conceptual argument links increased level of stock
market capitalisation with banks activities such as underwriting (Arestis, Demetriades and
Luintel, 2001). Second set of measures is focused on liquidity. The stock turnover ratio
measures the value of domestic shares traded by the size of the equity market while stock
traded ratio indicates both domestic and foreign shares multiplied by their respective
matching prices relative to the size of the economy. The latter measure also depicts the
overall level of stock market integration. Small stock markets can be liquid but only in
relation to the size of the market itself as oppose to the whole economy. In other words, it
may have high turnover ratio but a low value of total value of stocks traded. These measures
are very useful as they complement market capitalization. Conceptually, liquidity leads to
easier and less risk associated with transactions inducing investors to support long-term
entrepreneurial activities and induces more specialisation in the financial industry.
Accordingly, cross-section studies found liquidity of stock markets to be significantly
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correlated with output growth, capital stock growth and productivity (Levine and Zervos,
1998; Arestis, Demetriades and Luintel, 2000)
Data analysis
First set of scatter plots clearly demonstrates no correlation between size of the equity market
and economic growth. Stock market liquidity and economic growth are both positively but
weakly correlated. The total value of stock traded ratio has the strongest impact on economic
growth. The outliers (Qatar, China, Hong-Kong) repeat themselves across figure 1.1 and
figure 1.2. Figure 1.1 also shows that the outliers seem to go in line with the general
tendency. In other words, they confirm that the size of the market does not play any role in
economic growth. On contrast, they do not exemplify the general tendency in figure 1.2 and
figure 1.3 where stock market turnover and total value of shares traded lead to economic
growth. Hong-Kong surprisingly does not appear as an outlier in figure 1.3 as China takes
Hong-Kong’s far-end outlier place and remains the only notable exception which also
strongly supports the general tendency of the scatter plot. This suggests that while in Hong-
Kong the value of domestic shares is only relevant to the equity market itself, the economic
growth in China, depends on its higher liquidity regardless of the size of the equity market.
Turkey and South Korea, however, are outliers with high value of stocks traded but with
lower economic growth than foreseen by the general tendency. In spite of the fact that figure
1.3. has the largest R-square from this set (6.2%), even this observation is too weak
explaining little variability around its mean. On contrast to the outliers, the vast majority of
countries in this set are heavily concentrated on the left side of the X-axis due to the small
size and liquidity of markets which is a call for further enquiry.
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The second set of scatter plots is formed by 57 lower and higher income economies but it
excludes significant outliers from the previous set. The results show that neither the size of
the equity market, nor its liquidity have an effect on economic growth. Although stock
market turnover is very slightly positively correlated, it is more accurate to reject any
relationship with economic growth. There are some new outliers in figure 2.1 and figure 2.2
but these are relatively insignificant. It appears that India is the only significant exception to
the trend in terms of size and liquidity of the stock market. The removal of the outliers from
the first data has proven to have an effect on the second data set, especially on the total value
of stock traded ratio, now with the R-square of 0%, meaning there is no correlation in this
benchmark. Very weak R-square results are present in figure 2.1 and weak in figure 2.2
(0.01% and 3% retrospectively). However, with the exception of figure 2.2., much has
changed with regards to the individual data points groupings on the left side of the X-axis,
making the results more convincing in contrast to the previous set.
The final set of scatter plots includes only lower-income and lower-middle income
economies. The results suggest that size of the equity market has no effect on economic
growth. However, stock market turnover ratio and total value of shares traded appear to be
positively but weakly correlated with economic growth. India remains as the only notable
exception, much like in the second set. The weakness of the R-squared resembles previous
data sets with no correlation in the figure 3.1 and 3.3 while in 3.2, the stock market turnover
ratio has the highest R-squared of 3.9%. There are no significant outliers that are worth
scrutinising.
The empirical evidence demonstrates no correlation between the size of the equity market
and economic growth confirmed by all three sets. With regards to liquidity, the first and the
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third set of dataset support previous cross-section empirical data that suggest its impact on
economic growth (Levine and Zervos, 1998; Arestis, Demetriades and Luintel, 2000).
However, the interpretation of the empirical evidence on liquidity is tricky because the first
set changed significantly after the removal of the outliers. While it could be argued that
liquidity matters for lesser-developed economies, even the results from the third set (figures
3.2 and 3.3) are not fully convincing. We know that stock markets and banks never arise
simultaneously to provide different set of financial services, which means that the data is
already inherently biased even if scrutinising least-developed economies with infant financial
sector but the data for lower-income economies, if available, would be useful in analysing the
influence of stock market early linkages with banks and how these translate to economic
growth.
Despite the growth in the number stock markets in low-developed countries, the size and
liquidity of stock markets means are too low to suggest that stock markets of lower and
lower-middle income economies are ever going to make ever make significant impact on
economic growth, especially when banks can complement their services in a more efficient
way. A part of the explanation could lie in the IT service improvements that lead to increase
in international trade. This means that investors from developing countries are more keen on
investing abroad where a more sophisticated and open equity market system prevails, leaving
little resources to sustain domestic equity markets (World Bank, 2011). Developing countries
also highly depend on foreign direct investment that generally bypasses both banks and stock
markets in the private sector development. However, FDI has been found important in the
long-run stock markets development in Ghana (Adam and Tweneboah, 2009) calling for
further enquiry in this direction.
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Moreover, one of the main arguments against the effects of equity markets on economic
growth is that it leads to economic shocks that induce macroeconomic instability due to its
interaction with foreign exchange markets (Akyuz, 1993; Singh, 1997). Although this
argument is not very convincing with regards to lower-income economies that have less
impactful stock markets, it is still relevant to the methods used in this essay. In fact, it is
impossible given the means-removed averaged data to reflect economic shocks (-100% and
+100 has the same mean as -2% and +2%). The methods used do not account for the
interaction of different variables during unstable times and vice versa, not providing the full
picture of stock market development process. While stock market integration in India is well
reflected in the data, a stronger outlier China reflects the weaknesses of this method when
qualitative data is addded. In fact, China has experienced the fall of equities by almost 70%
after the stock market crashed in 2007, however, the GDP growth has actually increased (Li
et al., 2012). The R-square results also suggest that all the models explain little variability of
the response data around the mean, undermining the role of the stock market in economic
growth even further.
Conclusion
In spite of the strong theoretical foundation to support the impact of the stock markets on
economic growth, this view has been rejected with the use of scatter plots measuring size and
liquidity of the stock market in relation to the GDP growth. While it remains theoretically
difficult to assess the extend to which bank and stock market functions affect economic
growth, theoretical arguments in favour of stock market development as an important
ingredient to economic growth are generally very convincing and often well-supported
empirically (Atje and Jovanovic, 1993; Levine and Zervos, 1996a 1998b; Beck and Levine,
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2004). This paper, however, finds that stock market development does not lead to higher
economic growth in the long-run. In fact, there was no correlation between the size of the
equity market and economic growth confirmed by all three sets. With regards to the liquidity,
the picture is less straightforward which may suggest that liquidity may be more conductive
to economic growth (Levine and Zervos, 1998; Arestis, Demetriades and Luintel, 1996). In
fact, some positive but weak correlation is present, namely between the economic growth and
total value of stock traded ratio (figure 1.3) when all countries are included. However, once
outliers have been discounted, there is no longer an evidence of correlation (figure 2.3).
Secondly, there is a positive correlation between economic growth and stock market turnover
in the set of lower and lower-middle income countries (figure 3.2) but this correlation is once
again too weak. However, given strong methodological limitations and lack of some
important data especially on less-developed economies, these results are unable to provide
sufficient empirical evidence on this problem. Despite the significant linkages of value of
shares traded in the Chinese stock market to the GDP being the strongest outlier to support
the general tendency as presented in figure 1.3, the data used in this essay inaccurately reflect
real world events and/or provide little evidence on the factors that are more important in
relation to economic growth.
In future research, I recommend using variables closely related to economic growth such as
the gross domestic savings. With regards to the data observed, Chinese and Indian stock
markets are large and liquid in comparison to other economies in the sample. While China is
classified as upper-middle income country, India remains lower-middle income country and
might be therefore more relevant for empirical enquiry. Nevertheless, further analysis of both
of these countries may provide valuable insight to further our understanding on stock market
development effects on economic growth.
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Figure 1.2 full sample of 60 countries.
Appendices
1. Data set collection. 60 countries- 30 low-income and lower-middle income / 30 upper-
middle and high income.
Figure 1.1 full sample of 60 countries.
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Figure 1.3 full sample of 60 countries.
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Figure 2.2 sample of 57 countries (excl. CHN, HK, QAT)
2. Data set collection. 60 countries excluding various outliers.
Figure 2.1 sample of 57 countries (excl. CHN, HK, QAT)
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Figure 2.3 sample of 56 countries (excl. CHN, KOR, TUR, QAT)
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Figure 3.2 sample of of 30 Lower-Income, Lower-Middle income economies
3. Data set collection. 30 lower-income, lower-middle income economies.
Figure 3.1 sample of 30 Lower-Income, Lower-Middle Income economies
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Figure 3.3 sample of 30 Lower-Income, Lower-Middle income economies
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