Latin American Capital Markets

PROMOTING REGIONAL CAPITAL MARKET INTEGRATION 165employ confirm the same fact, namely that the exogenous component of financial intermediarydevelopment is positively associated with economic growth. The authorsprovide evidence that cross-country differences in the legal rights of creditors, the efficiencyof contract enforcement, and accounting system standards help explain crosscountrydifferences in the level of financial intermediary development, which in turnpositively affects economic growth.Beck, Levine, and Loayza (2000) study the effects of financial development oneconomic growth and the sources of economic growth.They focus on how developmentof financial intermediaries influences savings rates, physical capital accumulation,and total factor productivity growth.Their findings do not confirm a relationship betweenfinancial intermediary development and either physical capital accumulation orprivate savings rates. However, the findings indicate a significant positive link betweenfinancial intermediary development and growth in both real per capita gross domesticproduct and total factor productivity.Levine and Zervos (1996) investigate the empirical link between stock marketdevelopment and long-run growth.Their data suggest that stock market developmentis positively associated with economic growth. Moreover; instrumental variableprocedures indicate a strong connection between the predetermined component ofstock market development and economic growth in the long run. Levine and Zervos(1998) investigate whether well-functioning stock markets promote long-run economicgrowth.They study whether measures of stock market liquidity—including size,volatility, and integration with world capital markets—are correlated with current andfuture rates of economic growth, capital accumulation, productivity improvements, antsavings rates.They find evidence that stock market liquidity, as measured both by thevalue of stock trad ing relative to the size of the market and by the value of trading relativeto the size of the economy, is positively and significantly correlated with currentand future rates of economic growth, capital accumulation, and productivity growth.Rajan and Zingales (1998) examine whether financial development facilitateseconomic growth by scrutinizing one rationale for such a relationship, namely that financialdevelopment reduces the costs of external finance to firmsThey study whetherindustrial sectors that are relatively more in need of external finance develop disproportionatelyfaster in countries with more developed financial markets and find this tobe true in a large sample of countries in the 1980s. The results suggest that financialdevelopment may play a beneficial role in the development of new firms and that theexistence of a well-developed financial market may be a source of comparative advantagefor a country or region with industries that are more dependent on externalfinance.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub