Section 1　Literature

The relationship between finance and growth is in fact a classic theme which has engendered a real controversy during a long period of time，hence，the literature concerned is also numerous.I will just make a brief review as follows.

As a representative figure in the field of finance-growth studies，Ross Levine argued：“Financial development occurs when financial instruments，markets and intermediaries ameliorate...the effects of information，enforcement，and transactions costs and therefore do a correspondingly better job at providing the five financial functions.”（Ross Levine,2004）The five functions are producing information about possible investments and allocating capital，monitoring firms and exerting corporate governance，trading，diversification and management of risk，mobilization and pooling of savings，and easing the exchange of goods and services.These functions influence savings and investment decisions，and technological innovations and hence economic growth.

As“Rome was not built in a day”，the pioneering study to assess whether finance exerts a causal influence on growth is Goldsmith（1969）who，in using the data of35 countries during the period of1860-1963（when available），documents（graphically）a positive correlation between financial development and economic development with the finding that the financial intermediary size relative to the size of the economy rises as countries develop.

Nearly a quarter of century later，King and Levine（1993），the second pioneering study，had overcome the weaknesses in the previous literature by Goldsmith（1969）in adopting 77 country samples this time instead of 35 by Goldsmith and systematically controlling for other factors affecting growth.King and Levine（1993）examined three growth indicators averaged over 1960-1989：real per capita GDP growth，growth in capital stock per person and total productivity growth；they also constructed additional measures of the level of financial development which are DEPTH，BANK and PRIVY in order to measure the size of financial intermediaries，the degree to which the central bank versus commercial banks were allocating credit and the weight of credit to private enterprises respectively.

The definitions for these three variables are as follows：‘DEPTH’equals the value of liquid liabilities divided by the GDP，or DEPTH=Liquid Liabilities/GDP；‘BANK’is the value of deposit bank domestic credit divided by the sum of this credit plus central bank domestic credit，or BANK=Deposit bank domestic credit/［Deposit bank domestic credit+Central bank domestic credit］；and‘PRIVY’equals the value of gross claims on the private sector divided by the GDP，or PRIVY=Gross claims on the private sector/GDP.Please see Table0-1 for details.

Source:King and Levine(1993b),TableⅦ

*significant at the0.10 level,**significant at the0.05 level

(p-values in parentheses)

Observations:77

Variable definitions:

DEPTH=Liquid Liabilities/GDP

BANK=Deposit bank domestic credit/[deposit bank domestic credit+central bank domestic credit]

PRIVY=Gross claims on the private sector/GDP

Productivity Growth=Real per capita GDP growth-(0.3)*(Real per capita Capital growth)

Other explanatory variables included in each of the nine regression results reported above:

logarithm of initial income,logarithm of initial secondary school enrollment,ratio of government consumption expenditures to GDP,inflation rate,and ratio of exports plus imports to GDP.

Notes:King and Levine(1993b)define 2 percent growth as0.02.For comparability with subsequent tables,we have redefined2 percent growth as2.00 and adjusted the coefficients by a factor of 100.

King and Levine（1993）had found a strong positive relationship between each of the financial development indicators and the three growth indicators，and discovered that the sizes of the coefficients are economically large.↑DEPTH from the mean of the slowest growing quartile（0.2）to the mean of the fastest growing quartile（0.6）of countries→per capita growth rate↑by 1%per year；and the rise in DEPTH alone eliminates20%of the growth difference between the slowest growing and the fastest growing quartile of countries.

Further more，in order to examine whether finance simply follows growth，King and Levine（1993）studied whether the value of financial development in 1960 predicted the three growth indicators over the next 30 years.This predictability has finally been proved with the findings that the financial depth in 1960 is a good

predictor of subsequent rates of economic growth，capital accumulation and productivity growth；and that the coefficients are economically large.Bolivia：↑DEPTH（1960）from 10%of GDP to23%（mean for developing countries）→per capita GDP13%larger in 1990.See Table 0-2 for details.

Sources:King and Levine(1993b),Table VIII;and Levine(1997),Table 3

*significant at the0.10 level,**significant at the0.05 level

(p-values in parentheses)

Observations:57

Variable definitions:

DEPTH=Liquid Liabilities/GDP

Productivity Growth=Real per capita GDP growth-(0.3)*(Real per capita Capital growth)

Other explanatory variables included in each of the regression results reported above:

logarithm of initial income,logarithm of initial secondary school enrollment,ratio of government consumption expenditures to GDP,inflation rate,and ratio of exports plus imports to GDP.

Notes:King and Levine(1993b)and Levine(1997)define 2 percent growth as0.02.For comparability with subsequent tables,we have redefined2 percent growth as2.00 and adjusted the coefficients by a factor of 100.

After King and Levine（1993），Levine and Zervos（1998）constituted an important cross-country study on stock markets in adopting the data from 42 countries during the period of1976-1993.They construct numerous measures of stock market development，e.g.the‘Turnover Ratio’[1]which reflects trading frictions and information that induces transactions：the USA&Japan：0.5；Bangladesh，Chile and Egypt：0.06.Their findings demonstrate that the initial levels of stock market liquidity and banking development are positively and significantly correlated with future rates of economic growth，capital accumulation growth and productivity growth；and that the coefficients are large and economically significant：one-standard-deviation increase in initial stock market liquidity→per capita GDP15%higher；and the same increase in the bank credit→per capita GDP14%higher，together，per capita GDP almost 30%higher and productivity almost 25%higher.

Levine and Zervos（1998）also discovered that the link between stock markets，banks and growth ran robustly through productivity growth rather than physical capital accumulation；and that the stock market size or market capitalization/GDP was not robustly correlated with growth，capital accumulation and productivity improvements.This demonstrates that simply listing on the stock exchange does not necessarily foster resource allocation.See Table 0-3 for details.

Source:Levine and Zervos(1998),Table 3.

*significant at the0.10 level,**significant at the0.05 level.(p-values in parentheses)

Observations:42 for the real per capita GDP growth regression and41 for the others.

Variable definitions:

Bank Credit=Bank credit to the private sector/GDP in 1976 or the closest date with data.

Turnover=Value of the trades of domestic shares on domestic exchanges as a share of market capitalization of domestic shares in 1976 or the closest date with data.

Productivity Growth=Real per capita GDP growth-(0.3)*(Real per capita Capital growth)

Other explanatory variables included in each of regression results reported above:

logarithm of initial income,logarithm of initial secondary school enrollment,ratio of government consumption expenditures to GDP,inflation rate,black market exchange rate premium,and frequency of revolutions and coups.

Notes：Levine and Zervos define 2 percent growth as0.02.For comparability with subsequent tables,we have redefined2 percent growth as2.00 and adjusted the coefficient,by a factor of 100.

However，the theme of causality between finance and growth had not yet been well studied till the year2000.Even Levine and Zervos（1998）think that，the above pioneering literature had some limitations：they did not deal formally with the issue of causality while they showed the prediction，there were difficulties in measuring liquidity，the link between trading and future economic growth might not represent a link between liquidity and growth，they excluded other components of the financial sector while they included measures of the functioning of stock markets and banks，finally，the stock markets may do more than provide liquidity.

To assess whether the finance-growth link is driven by simultaneity bias，one needs instrumental variables that explain cross-country differences in financial development，but are uncorrelated with growth beyond their link with financial development.Here is the following pioneering literature by Levine，Loayza and Beck（2000）.

‘This is a cross-country study on causality with the data from 71 countries during the period of1960-1995，and the findings are numerous：

a）The results indicate a very strong connection between the exogenous components of financial development and long-run economic growth；

b）Indicate also that the strong link between financial development and growth is not due to simultaneity bias；

c）Instrumental variable results demonstrate an economically large impact of financial development on growth.India：↑value of private credit from19.5%of the GDP to 25%（the mean for developing countries），and Argentina：from its value of private credit to the mean→per capita GDP growth↑by 0.6%and 1%per year respectively for India and Argentina，this is large considering an average of1.8%per capita GDP growth.’

Studies of finance and growth have also used other methodologies such as time-series methodologies，panel data techniques，industry and firm level studies and case studies.Among them，Rajan and Zingales（1998）was an industry level analysis using industry-level data of36 industries from 42 countries during the period of1980-1990 in order to identify which industries are‘naturally heavy users’of external finance.

The findings had in fact approved the hypothesis that the industries which were“naturally heavy users”of external finance benefit more from greater financial development than industries that were not.Increase in financial development disproportionately boosts the growth of industries that are‘heavy users’，the percentile of dependence is75th and 25th for machinery and beverages respectively，and the percentile of stock market capitalization is 75th and 25th for Italy and Philippines，machinery should grow1.3%faster than beverages in Italy compared with Philippines（actual difference,3.4%）.See Table 0-4 for details.

Notes：

Source:Rajan and Zingales(1998),Table 4.

The table above reports the results from the regression：

Two regressions are reported corresponding to two values of FDi,Total Capitalization and Account Standards respectively.

(Heteroskedasticity robust standard errors are reported in parentheses.)

Externalk is the fraction of capital expenditures not financed with internal funds for U.S.firms in industry k between1980-1990.

Total Capitalization is stock market capitalization plus domestic credit.

Accounting Standards is an index of the quality of corporate financial reports.

In the industry level literatures，Wurgler（2000）used data from65 countries during 1963-1995，computed an investment elasticity which could directly measure the degree to which financial system reallocated flow of credit.The findings approved that countries with higher levels of financial development increased investment more in growing industries and decreased investment more in declining industries than financially underdeveloped economies.

Another important analysis examines whether financial development influences the degree to which firms are constrained from investing in profitable growth opportunities.Demirguc-Kunt and Maksimovic（1998），had discovered by using firm-level data of26 countries during 1980-1991 that both banking system development and stock market liquidity were positively associated with the excess growth of firms，as in Levine and Zervos（1998），the size of the stock market was not related to firm growth.See Table 0-5 for details.

Notes：

Source：Demirguc-Kunt and Maksimovic(1998),Table V.

(White’s heteroskedasticity consistent standard errors in parentheses)

***indicates statistical significance at the1 percent level.

1.The proportion of firms whose growth rates exceed the estimate of the maximum growth rate that can be financed by relying only on internal and short-term financing.

Market Capitalization/GDP:The value of domestic equities listed on domestic exchanges as a share of GDP.

Turnover:The total value of trades of domestic shares on domestic exchanges as a share of market capitalization.

Other regressors:Rate of inflation,the law and order tradition of the economy,i.e.,the extent to which citizens utilze existing,legal system to mediate disputes and enforce contracts,growth rate of real GDP per capita,real GDP per capita,government subsidies to private industries and public enterprises as a share of GDP,and net fixes assets divided by total assets.

Time Period：The dependent variable is averaged over the1986-1991 period.All regressors are averaged over the 1980-1985 period,data permitting.

Another firm-level analysis，Love（2003），used the firm-level data from40 countries to examine whether financial development eased firms’financing constraints.The findings are as follows:

Sensitivity of investment to internal funds was greater in countries with poorly developed financial systems.

Greater financial development reduced the link between availability of internal funds and investment.Financial development was particularly effective at easing the constraints of small firms.

Finally，the detailed Country(Region)Case-Studies have also contributed to the finance-growth literature.As one of two classic studies，Cameron，Crisp，Patrick and Tilly（1967）analyzed the historical

relationships between banking development and early stages of industrialization for England（1750-1844），Scotland（1750-1845），France（1800-1870），Belgium（1800-1875），Germany（1815-1870），Russia（1860-1914），Japan（1868-1914）.

McKinnon（1973），another classic one，studied the relationships between the financial system and economic development in Argentina，Brazil，Chile，Germany，Korea，Indonesia and Chinese Taiwan；documented critical interactions among financial intermediaries，financial markets，government policies，and the financing of industrialization.The mass of evidences emerging from these country(region)studies suggest that better functioning financial systems support faster economic growth.

Jayaratne and Strahan（1996）make a country case study on the USA to estimate the change in economic growth rates after branch reforms relative to a control group of states that did not reform as since the early 1970s，35 states of the USA relaxed impediments on intrastate branching for banks.They found that branch reform accelerated real per capita growth rates by improving the quality of bank loans and the efficiency of capital allocation.

Haber（1991，1997）made other country case studies on Brazil，Mexico and the USA（1830-1930）.Brazil overthrew the monarchy in1889，formed the First Republic，dramatically liberalized restrictions on financial markets；this liberalization gave more firms easier access to external finance，and hence industrial concentration fell and production boomed.On the contrary，the financial liberalization in Mexico was much milder under the Diaz dictatorship（1877-1911）as it relied on the‘financial and political support of a small in-group of powerful financial capitalists’，hence，the decline in concentration and increase in economic growth were much weaker than Brazil.

Concerning the correlationship between finance and growth，please see Section1，Part 1 for the details of evolution during one century and three decades from Walter Bagehot（1873）to Levine et al.（2000）and Beck et al.（2000）.

In using five BRIC countries（Brazil，Russia，India，China and South Africa），Pradhan et al.（2013）confirmed bidirectional causality between financial development and economic growth in these five economies，and their studied advances the policy implication that‘the economic policies should recognize the finance-growth nexus in order to maintain sustainable development in the economy’.

The relationship between financial development and economic growth can be linear，and can be not linear.Chen et al.（2013）examined the non-linearity of this relationship in China in using a threshold model with cross-provincial data from1978，beginning of the reform and opening-up to 2010.They discovered that‘finance has a strong positive influence on growth in high-income provinces，but a strong negative impact on growth in low-income provinces’in China.

2001，year of China’s accession to the World Trade Organization（WTO），is a benchmark for Chinese economy and also for a watershed for research in the field of relationship Finance-Growth.Zhang et al.（2012）investigated this relationship at the city level in China in using both traditional cross-sectional regressions and first-differenced and system CMM(Capability Maturity Model)estimators for dynamic panel data.Their conclusion is that‘most traditional indicators of financial development are positively associated with economic growth’，and‘the financial reforms that have taken place after China’s accession to the WTO are in the right direction’.

We need to mention two recent papers written by other experts in Chinese economy J.P.Laffargue and his Chinese Hongkong colleague E.S.H.Yu：One is‘The Chinese Savings Puzzles’，and another is‘Consumption，Investment and Savings in China’.

In the‘The Chinese Savings Puzzles’，Laffargue et al.（2013a）tried to solve the famous savings puzzles.The result is2 main causes：‘The first one is the high and increasing share of Chinese firms and financial institutions in the national disposable income（these agents have no final consumption and so save their whole disposable income）’，and‘The second cause of China’s savings puzzle relates to the increasing and high household savings rate’.

In the‘Consumption，Investment and Savings in China’，Laffargue et al.（2013b）tried to explain the phenomenon that the national savings and investment of China have been increasing at faster rates than the GDP since the early1990s：‘More complete explanations have to refer to specific features of the political and economic institutions of China，and to the incentives they induce among its economic agents.’

With regard to other literature till 2014，as they are numerous，I use them directly in the closely related part or section.Hence，the review of recent literatures is not repeated here.

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注释

[1] The Turnover Ratio equals the total value of shares traded on a country’s stock exchanges divided by stock market capitalization or value of shares listed.