Sources and Obstacles for Growth in Transition Countries: The Role of Credit
Sources and Obstacles for Growth in Transition Countries: The Role of Credit
One of the distinguishing features of planned economies was the total irrelevance of credit and finance for the determination of output. Market reforms gave credit and finance a central role in economic activity. This chapter identifies some causes for the continuing underdevelopment of financial markets and explores the implications of such underdevelopment for growth in transition countries. Through an econometric analysis of microdata for a relatively large set of countries, including both advanced European and transition countries, it shows that financial sector development, through an increase in the depth of both bank credit and stock markets, would induce large growth effects. The chapter also finds that the impact of financial sector development on growth seems to be larger in transition than mature industrial countries. This suggests that growth effects are larger at lower levels of development of a financial sector, a condition characterizing most transition countries.
Keywords: financial markets, transition countries, financial sector development, bank credit, stock markets
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