UNCTAD
Multi-Year Expert Meeting on Commodities
and Development 2013
Recent developments and new challenges in commodity markets, and policy
options for commodity-based inclusive growth and sustainable development
Room XXVI
Palais des Nations
Geneva, Switzerland
The role of financial innovations in developing countries:
towards inclusive growth and sustainable development
by
Jean-Louis Arcand
Director, Centre for Finance and Development
Professor, Department of International Economics
Head, PhD in Development Economics Programme
The Graduate Institute - Geneva
20 MARCH 2013
This material has been reproduced in the language and form as it was provided. The views expressed are those of
the author and do not necessarily reflect the views of UNCTAD.
Development, …nance and commodities
Non-monotonicity?
Cross-section
The role of …nancial innovations
in developing countries:
Towards inclusive growth
and sustainable development
Jean-Louis Arcand
Director, Centre for Finance and Development
Professor, Department of International Economics
Head, PhD in Development Economics Programme
The Graduate Institute j Geneva
www.graduateinstitute.ch/cfd
www.graduateinstitute.ch/economics/faculty/arcand
Geneva, March 2013
Panel
Conclusions
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
A traditional topic, at least with respect to the …rst two
components
Bagehot (1873), Schumpeter (1911), Goldsmith (1969)
Financial intermediation improves e¢ ciency (not volume) of
investment
Theory: Jovanovich (1990), Bencivenga and Smith (1991)
Financial development simply a by-product of economic
development
Robinson (1952): “where enterprise leads, …nance follows”
More recent empirical work:
King and Levine (1993): …nancial depth
Levine and Zervos (1998): stock market liquidity (not size of
the stock market)
What is needed at the macro level is to di¤erentiate in terms
of the importance of commodities for the countries in the
sample
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Trying to establish causality
The problem: measures of …nancial development on the RHS
of the growth regression are almost certainly endogenous
Less of a problem for commodity-dependence: simple
interaction term
Need to think carefully about the identi…cation strategy
Two solutions proposed
1. Traditional IV or GMM
Levine, Loayza, and Beck (2000): instrument their cross
sectional regressions with legal origin (La Porta et al., 1998)
Beck, Levine, and Loayza (2000): use standard GMM
2. An important technical innovation
Uses sectoral (and not country-level) data + DID
identi…cation strategy
Rajan and Zingales (1998): industrial sectors that are more
dependent on …nance grow relatively more in countries with a
larger …nancial sector
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Non-monotonicity in the relationship?
Precursors
Minsky (1974), Kindleberger (1978): possibility that …nancial
sector may ultimately reach a size where there are negative
marginal social returns (but emphasis is on volatility aspects)
Tobin (1984): the best and the brightest...
More recent sceptics
Rajan (2005): presence of a large and complicated …nancial
system has increased the probability of a “catastrophic
meltdown”
Gennaioli, Shleifer, and Vishny (2010): with neglected tail risk
…nancial innovation can increase …nancial fragility even in the
absence of leverage
No link made heretofore to commodities
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Conditionality in the relationship?
Large literature
Demetriades and Hussein (1996): time series for 16 countries:
no causal relationship going from …nance to growth
Demetriades and Law (2006): …nancial depth does not a¤ect
growth when institutions are poor
Rousseau and Wachtel (2002): …nance has no e¤ect on growth
in countries with double-digit in‡ation
De Gregorio and Guidotti (1995): …nancial depth is positively
correlated with output growth in high income countries over
1960-1985, but correlation becomes negative for 1970-85
Capelle-Blancard and Labonne (2011): relative number of
employees or credit volume/employees has no impact on
growth in the OECD
Rousseau and Wachtel (2011): …nancial depth and credit to
the private sector has no statistically signi…cant impact on
GDP growth over 1965-2004
Most relevant sub-literature: Arestis and Demetriades (1997) and
Arestis et al. (2001): institutional factors a¤ect the relationship
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Empirical approach
Six di¤erent combinations of types of data and estimators
Country data: cross section
1. Linear cross-section with quadratic term
2. Semiparametric cross-section
Country data: panel
3. Panel system GMM with quadratic term
4. Panel semiparametric
5. Panel system GMM with interactions in quadratic term
Industry-level data
6. Rajan-Zingales DID approach with quadratic term
Results are remarkably stable across types of data or
econometric methodology....
...even when we try hard, we can’t kill the result
Conclusions
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
The marginal impact of credit to the private sector
-10
-5
dGR/dPC
0
5
10
Figure:
0
.25
.5
.75
1
Credit to Private Sector/GDP
1.25
1.5
Conclusions
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Cross-sectional semiparameric results
Figure: Semiparametric estimation compared with quadratic parametric
…t
Semi-parametric regressions using cross-country data
With Controls
0
-1
.5
0
1
GR
GR
1
1.5
2
2
3
2.5
Without Controls
0
.5
1
1.5
0
PC
.5
1
PC
Credit to Private Sector/GDP
1.5
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Figure: Credit to the Private Sector. Evolution of credit to the private
sector over GDP (PC) for the sample of countries included in the
cross-sectional regressions. The left panel plots the mean and median
values of PC. The right panel plots the share of observations for which
PC>90% (solid line) and PC>120% (dashed line).
PC>90% & 120% of GDP
0
.2
.1
Share of obs
.2
Credit to Private Sector/GDP
.4
.6
.3
.8
Mean and Median Values
1960
1970
1980
1990
Year
MEAN
2000
2010
MEDIAN
1960
1970
1980
1990
Year
P90
2000
P120
2010
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
-10
-5
dGR/dPC
0
5
10
Figure: Marginal E¤ect Using Panel Data.
0
.5
1
1.5
Credit to Private Sector/GDP
2
2.5
Conclusions
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Figure: Countries with Large Financial Sectors (2006). This …gure
plots the 2006 level of credit to the private sector over GDP (PC) for all
countries that in 2006 had values of PC>90%. The vertical line is at
PC=110%.
ISL
USA
CAN
DNK
NLD
IRL
CHE
CYP
GBR
ESP
PRT
ZAF
HKG
LUX
NZL
KOR
AUT
SWE
DEU
MLT
AUS
MYS
NOR
JPN
FRA
SGP
ITA
0
1
2
Credit to the Private Sector/GDP
3
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Panel semiparametric results
-6
-4
GR
-2
0
2
Figure: Semi-Parametric Regressions using Panel Data. Solid black
line plots semiparametric relationship between PC and GR. Dotted lines
are 95% con…dence intervals and solid light grey line plots the parametric
quadratic …t.
0
1
2
Credit to Private Sector/GDP
3
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Conclusions
Empirical …ndings
In countries with very large …nancial sectors there is no
positive correlation between …nancial depth and economic
growth
There is a positive and robust correlation between …nancial
depth and economic growth in countries with small and
intermediate …nancial sectors
There is a threshold (estimated to be at around 80-100% of
GDP) above which …nance starts having a negative e¤ect on
economic growth
Results are robust to using di¤erent types of data and
estimators
No empirical evidence of di¤erence of inverted U-shaped
relationship between …nance and growth, between
commodity-rich and commodity-poor countries
Development, …nance and commodities
Non-monotonicity?
Cross-section
Panel
Conclusions
Conclusions
Implications and research priorities
This is only a …rst pass at the cross-country level...
An interesting research agenda for the future
More macro-level evidence is needed to disentangle e¤ects of:
Institutions
Geography
Resource / commodity abundance
and their interactions
Micro-level evidence is especially lacking
Di¢ culty of …nding convincing identi…cation strategies