Stock Market Development And Economic Growth In The Least Developed Countries



Abstract

Empirically we investigate how three types of private capital flows could promote economic growth in recipient developed and developing countries. Our focus is on the role of stock markets as a channel through which foreign capital flows could promote growth. The findings reveal that FDI exhibits a positive impact on growth, while both foreign debt and portfolio investment have a negative impact on growth in all sample countries. However, our results indicate that stock markets might be a significant channel or leading institutional factor through which capital flows affect economic growth. The findings provide clear implications that the negative impact of private capital flows can be transformed into a positive one if the stock market development has attained a certain threshold level, regardless of whether it is in developed or developing countries.

Table of Content

CHAPTER ONE4

INTRODUCTION4

CHAPTER TWO17

LITERATURE REVIEW17

Theoretical framework17

The long-run: the effect of stock market development on growth27

The short-run: reform, valuation changes, and private investment28

A caveat: recent developments in the literature on external finance29

Motivation for re-examining the relation between stock markets and growth31

Sample divisions across national income31

Alternative characteristics of equity markets across high and low-income countries33

Temporal out-of-sample tests34

CHAPTER THREE44

METHODOLOGY44

CHAPTER FOUR47

RESULTS AND DISCUSSION47

Private capital flows, stock market indicators and economic growth in least developed countries, 1988-200247

Private capital flows, stock market indicators and economic growth in least developing countries, 1988-200256

CHAPTER FIVE68

CONCLUSION68

Conclusion and policy implications68

REFERENCES84

Chapter One

Introduction

In the past decade, there has been considerable effort made to more fully understand the contribution of private stock market development towards economic growth of LDCs. In particular, whether private stock market development are beneficial for long-term economic growth of LDCs. A number of studies have confirmed the pivotal role of private stock market development in promoting economic performance. For example, Borensztein et al. (1998) suggested that the presence of foreign stock market development could provide additional capital to local savings and promote capital accumulation; thus implying that the crowd-in effect was higher than the crowd-out effect. As a result, stock market development could increase growth through knowledge spillover and market efficiency effects. In a related work, Bosworth and Collins (1999) estimated that from 1978 to 1995, on average, a dollar of international stock market development increased domestic investment by more than 50 cents.

In recent years, however, economists have been increasingly interested in the risks associated with private stock market development. On this important subject, Brecher and Diaz-Alejandro (1977) claimed that certain types of stock market development might incur welfare losses to recipient countries as a result of distorted consumption and production patterns. More recently, McKinnon and Pill (1997) argued that in cases where moral hazard problems exist, domestic banks could indulge in excessive lending financed by foreign funds, which may be harmful for economic progress. Calvo, 1998 G.A. Calvo, Capital flows and capital-market crises: the simple economics of sudden stops, Journal of Applied Economics 1 (1998), pp. 35-54.Calvo (1998) and others found that negative swings in foreign capitals might result in widespread bankruptcies, jeopardizing domestic credit channels, and ...