Teacher Svirskyy V. S.

Ternopil National Economic University, Ukraine

Financial Aspects of Economic Growth

Finance has a close intercommunication with economic processes in a country. Being the instrument of division and redistribution of GDP, finance can stimulate as well as impede economic growth. Economists have been discussing the role of the financial sector in the economic growth for almost two centuries and their thoughts have not always characterized by complete agreement. Since the earliest arguments pointing the finance-growth nexus were brought forward (Bagehot [1]; Bunge [2]; Schumpeter [3]; Yangul [4]), a huge amount of theoretical, historical and empirical researches have appeared (see survey of this literature Svirsky [5]). In the earlier literature, there were significant disagreements in economists’ views on the nexus between finance and growth. On the one hand, J. Robinson [6] and Nobel Laureate R. Lucas [7] consider that finance does not cause growth. On the other hand, another Nobel Laureate M. Miller argues that the finance-growth nexus is “…too obvious for serious discussion” [8]. Nowadays economic scientists came to the consensus about the impact of finance on economic growth. Nobel Laureate J. Stiglits famously argues that “We have come a long way since the time when many viewed the financial system simply as a sideshow, or a passive channel that allocated scarce resources to the most efficient uses. Today, almost everyone agrees that the financial system is essential for development. Improving the financial system can lead to higher growth…” [9].

The positive impact of the financial sector on accelerating growth is achieved through a number of specific tasks and functions that the financial sector performs. Functions specify what must financial systems do and tasks represent what exactly it does. The main tasks of financial systems performance are:

1. Mobilization and accumulation of financial resources. Usually some economic agents have not enough of their own financial resources to undertake investments themselves. Simultaneously, other part of economic agents has temporally free capitals and can invest them. But the problem is that these capitals separately are very small and have to be pooled before investing. The financial system has to solve this problem by agglomerating capital from many smaller savers. In other words financial system has to mobilize all potential resources to finance economic growth.

2. Allocating capital and monitoring investments. It is obvious, that mobilization of financial resources is not the end in itself. Thus, the financial system must provide its investing and effective use. In addition these resources have to be backed to their owners with a profit.

3. Optimal division and redistribution of GDP. The financial system has to guarantee the optimal division and redistribution of GDP to satisfy the requirements of all economic agents – government, enterprises and households.

The implementation of above mentioned tasks depends on financial functions providing by financial system: intercessory, informative, providing of liquidity and management of risks.

Intermediation is a key function of financial system. It would be very difficult to implement tasks of financial systems performance without this function. Mobilization and accumulation of financial resources, allocating capital and monitoring investments can be provided by the intercession of the different parts of financial system: state finance, financial sector or corporate finance. In an administrative economy a key role in the transformation of savings into investments was played by the state. The considerable share of national income was centralized in a budget. In the conditions of market economy the financial sector (banking system and non-bank financial institutions) plays the major role in this intermediation. The state gets only a small part of national income by its redistribution.

It is obvious that transformation savings into investments is possible even without financial system. However frequently it is not only inadvisable but impossible. For example, individual entrepreneurs seldom have an adequate amount of their own financial recourses to undertake investments themselves. Individual savers, without pooling their money, would not be able to take benefit of the potential increasing returns to scale of their investments, and would face a large level of risk with slight liquidity. That’s why we need the financial system which resolves these problems by agglomerating capital from many smaller savers, allocating capital to the most effective uses, and monitoring to guarantee that it is being used well. Simultaneously, the financial system reduces risk, increases liquidity, and conveys information [9].

Any financial relations are related to the risks. Financial systems help mitigate the risks linked with individual projects, firms, industries, regions, and countries. Ability of the financial system to manage these risks largely affects the acceleration of rates of economic growth by improving resource allocation and encouraging savings. It is evident that individual investors will chose investments with the less degree of risk. Consequently, it doesn’t promote investments in growth-enhancing innovative activities, because they are very risky. These risks go down substantially, when the process of transformation savings into investments takes place by the intercession of the financial intermediary. Even in the case of bankruptcy of borrower (issuer) the loss for separate individual savers will not be perceptible, because the risk of investment is diversified between plenty of depositors of financial institute and losses will be recovered by profits from other investments of this financial intermediary.

Providing of liquidity is also an important function of the financial system which has a direct influence on the acceleration of economic dynamics. Liquidity is the cost and speed with which economic agents can convert financial instruments into purchasing power at agreed prices. The typical link between liquidity and economic growth arises because some high-return projects require a long-run pledge of capital, but savers do not like to abandon control of their savings for a long period. Therefore, if the financial system does not strengthen the liquidity of long-term investments, less investment is likely to occur in the high return innovative and risky projects. With liquid capital markets, savers can hold liquid assets that they can quickly and easily sell if they seek access to their savings. At the same time, capital markets transform these liquid financial instruments into long-term capital investments.

Individual savers face high costs of acquiring and processing information possible profitable investments. It could prevent capital from flowing to its best uses. Financial system produces information about possible investments and allocating of capital, reduces information costs (through specialization and economies of scale) and also helps identify the best production technologies and entrepreneurs ideas. Thus, it improves resource allocation and accelerates economic growth.

Bibliography:

1. Вagehot, W. (1873), Lombard Street: A Description of the Money Market http://socserv2.mcmaster.ca/~econ /ugcm/3ll3/bagehot /lombard.html.

2. Бунге: сучасний дискурс/За ред. В.Д. Базидевича. – К.: Знання, 2005. – 697 с.

3. Шумпетер И. Теория экономического развития. – М.:Прогресс, 1982. – 455 с.

4. Янжул И.И. Основные начала финансовой науки. Учение о государственных доходах. – М.: «Статут», 2002. – 555 с.

5. Свирский В. С. Финансовая система как катализатор экономического роста: обзор основных научно-теоретических концепций и эмпирических результатов / Инновационное развитие современных социально-экономических систем: материалы международной научно-практической конференции (г. Комсомольск-на-Амуре 2009 г.): В 2 ч. Ч. 2 / Редкол.: В.В. Летовченко (отв. ред.) и др. – Комсомольск-на-Амуре: ГОУВПО «КнАГТУ», 2009. – С. 10-14.

6. Robinson, J. (1952) “The Generalization of the General Theory.” In The Rate of Interest and Other Essays. London: MacMillan.

7. Lucas, R. (1988), “On the Mechanics of Economic Development”, Journal of Monetary Economics, № 22, 3-42.

8. Miller, M. (1988) “Financial Markets and Economic Growth.” Journal of Applied Corporate Finance № 11 (5): 8−15.

9. Stiglits J. (1998) “The Role of the Financial System in Development” http://econ.worldbank.org/W... html.