Svetlana Andrianova

Finance and Growth: What We Know and What We Need To Know

In modern economies finance underpins virtually every economic transaction that takes place. When we go to the supermarket, we usually pay using credit or debit cards issued by commercial banks (or the supermarkets themselves). Even when we pay using cash, we have to first find an ATM in order to withdraw the necessary bank notes. The banking system, which includes commercial banks as well as the central bank (the Bank of England in the United Kingdom), provides the payments system which makes economic exchange possible. It is hard to imagine what economies would look like without ‘money’ — broadly defined as anything that is used in exchange for goods and services and the settlement of debt. Besides providing the means of payment, which underpins all economic transactions, the financial system provides a link between current and future output and consumption. When we borrow from a bank to buy a car, we are essentially bringing forward consumption against future income. This is made possible because financial intermediaries, like banks, raise funds from surplus units (those economic agents whose income is greater than their current expenditure) and pass them on as loans to deficit units (those economic agents whose income is less than their current expenditure).

Government Ownership of Banks, Institutions and Economic Growth

We put forward a modern version of the ‘developmental’ view of government-owned banks which shows that the combination of information asymmetries and weak institutions creates scope for such banks to play a growth-promoting role. We present new cross-country evidence consistent with our theoretical predictions. Specifically, we show that during 1995–2007 government ownership of banks has been robustly associated with higher long run growth rates. Moreover, we show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to conditioning on more ‘fundamental’ determinants of economic growth.

Why Do African Banks Lend So Little

We put forward a plausible explanation of African financial under-development in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). Applying a dynamic panel estimator to a large sample of African banks, we show that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.

Is Government Ownership of Banks Really Harmful to Growth

We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more “fundamental” determinants of economic growth. We also present new cross-country evidence for 1995- 2007 which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates. While acknowledging that cross-country results need not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.

Sources and Effectiveness of Financial Development: What We Know and What We Need to Know

There is a broad consensus in the finance-growth literature that, with few exceptions, there exists a positive long-run association between financial development and economic growth. This relationship is fairly robust to how financial development is measured — be it using indicators of banking or capital market development — and estimated; the latter ranging from cross-country to time-series and panel data techniques. Importantly, financial development has been shown to be one of the most robust determinants of economic growth, alongside most of the alternatives (for example, King and Levine 1993). Thus, financial development may hold the key to economic prosperity and may, consequently, be a powerful mechanism for reducing poverty worldwide.1 As a result of this widespread consensus, the finance-growth literature has recently begun to shift its attention towards understanding why some countries have been able to develop their financial systems, while some others have not.

Corruption and Reputation

This paper examines corruption in a random matching game where past actions are imperfectly observed and players have the option to continue trading with their existing partners. It shows that the effect of individual reputations for honesty may outweigh the effect of a bad collective reputation depending on the expected value of a continued match relative to the corruption gain. Copyright 2001 by Scottish Economic Society.

Ethnic Fractionalization, Governance and Loan Defaults in Africa

We present a theoretical model of moral hazard and adverse selection in an imperfectly competitive loans market that is suitable for application to Africa. The model allows for variation in both the level of contract enforcement (depending on the quality of governance) and the degree of market segmentation (depending on the level of ethnic fractionalization). The model predicts a specific form of non-linearity in the effects of these variables on the loan default rate. Empirical analysis using African panel data for 111 individual banks in 29 countries over 2000-2008 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.

Financial Development and Financial Fragility: Two Sides of the Same Coin?

The paper puts forward three interrelated reasons that account for the recent breakdown of the finance–growth nexus, comprising the use (or abuse) of the relationship by policymakers, capture by ruling elites and institutional constraints. Evidence consistent with these hypotheses is provided from a recent European banking crisis. It concludes that in order to restore the ability of finance to promote growth, the influence of ruling elites on the rule of law, financial regulation and supervision needs to be minimized.

On Corruption and Institutions in Decentralized Economies

This paper presents a model of opportunistic behaviour in decentralized economic exchange and considers the impact of inadequate institutional framework of formal contract enforcement on economic performance. It is shown that (i) when the number of cheating traders is sufficiently large, inadequate institutions result in a loss of decentralized trading contracts, (ii) an adequate institutional framework, while being necessary for the attainment of a Pareto optimal outcome, may not be sufficient if traders perceive it as inadequate; and (iii) sufficiently good formal enforcement provisions help deter contractual breach in environments with corrupt and powerful enforcers.