THE ROLE OF THE FINANCIAL SYSTEM IN OVERCOMING THE UNEVEN REGIONAL DEVELOPMENT OF A COUNTRY

Transcription

1 Наукові праці. Економіка УДК Khanzhyn V. V., phlosophy doctor (PhD), nterm assstant professor at economc theory and nternatonal economcs department, Petro Mohyla Black Sea State Unversty, Mykolayv, Ukrane, emal: THE ROLE OF THE FINANCIAL SYSTEM IN OVERCOMING THE UNEVEN REGIONAL DEVELOPMENT OF A COUNTRY Ths study utlzes a smple endogenous growth model and extends t to the case of two regons lnked through ther fnancal sectors. We model the nfluence of the fnancal development on the regonal growth and extend the model for the multple-regon case to enable the emprcal analyss usng data on the US states. Despte our nterest n uneven regonal growth n developng countres, the model s best tested usng data from the regons of developed countres. These countres have accumulated suffcently detaled and consstent data. In ths study, I propose to use US state-level data. The specfc hstorc development of the regonal bankng n US, partcularly the restrctons on ntrastate and nterstate bankng, created regonally dstnct bankng systems. Key words: regonal development; fnance-growth nexus; endogenous growth model; fnancal development. Research problem statement. Among many economc problems n developng countres and countres n transton s the problem of uneven regonal development. For nstance, n Ukrane 7 regons out of 24 obtan about 60 % of the annual nvestment [1]. One of the fastest developng sectors of Ukranan economy nowadays s fnancal servce sector. Even though the amount of fnancal ntermedares ncreases, there s stll growng regonal dsparty. The general trend of the busnesses to locate closer to the fastest growng regons s motvated by the dffculty of avalablty of the credt resources for the small and medum busnesses n the stagnatng regons. The analyss of the regonal economc development programs n Ukrane showed that they don t treat the fnancal development of the regon n a systematc way. That n bref shows the mportance of the theoretcal framework, whch would enable a more complete analyss of the regonal development n the long-run perspectve. The analogous studes show the growng nterest n the so-called fnance-growth nexus n the regonal context also n developed countres (for nstance [4]). Lterature revew. A number of researchers have contrbuted to the lterature on fnance-growth nexus. Among most promnent contrbutors to the Englshlanguage lterature on the topc are: J. Schumpeter, R. Goldsmth, H. T. Patrck, and R. Levne, R. G. Raan, L. Zngales, and A. Demrguc-Kunt. Ukranan lterature on the topc s stll very lmted [2, 3, 5, 7, 8, 10]. Identfyng the prevo uslyunsolved parts of the general research problem. There s a lack of the formal regonal models, despte the growng popularty of usng state data n the emprcal works. To tll ths gap we utlze the endogenous growth theory and buld a two-regon framework wth no perfect captal moblty assumpton that s used to analyze how dfference n fnancal development of the two regons can account for the dfference n the rates of convergence (and even cause dvergence) of ther per capta outputs. The framework s then extended to multple-regon case. Statng the goals of the paper. The obectve of ths research s to study the role of the fnancal system n the regonal development dsparty. I am tryng to answer the queston f the dfference n the fnancal development of regons can explan the dfference n ther economc growth, measured as per captal output. My nterest n ths subect stems from a desre to understand the uneven development and levels of captal nvestment n regons wthn developng countres. However, gven the lmted qualty of sub-natonal data avalable n most developng countres I must test the model utlzng regonal data from a developed country. In partcular, I utlze data from 50 Unted States. The body of the research. Followng Romer [9] we develop a smple two-regonal endogenous growth model, where the type of the connecton between the regons resembles that of Center-Perphery. We use the dea of Kang and Sawada [6], who mplement endogenous growth model n studyng the nfluence of the fnancal development on the growth. Snce our prmary nterest s to study the effect of the fnancal system development on the growth dfferental between the two regons, we smplfy the underlyng producton functon to only two producton factors, excludng human captal. The source of growth n our model s neoclasscal technologcal advance, A. The producton of the new knowledge s modeled as a research and development sector, whch utlzed 106

2 Output per capta Випуск 263. Том 275 producton factors and exstng level of technology. The focus s on the way the dfference n the fnancal development of the regons nfluences the dfference n ther per captal output growth. To model the fnancal sector on the regonal level we use the smple endogenous growth model n contnuous tme, developed n Romer [9]. Gradually we break the sngle-regon economy nto two-regon case and then add the model of the fnancal system and study the development of the output per capta n those models. The producton functon s assumed to be the same for both regons and t s of the Cobb-Douglass 1 form: Y K ( AL ), 1, 2. The captal accumulaton s gven by:. K sy I In ths case the source of the regonal nvestment s solely domestc regonal savngs. Followng Romer, for smplcty the captal s assumed to be used up entrely n one perod, so there s no deprecaton ncluded nto the captal accumulaton rule. The producton functon of the new technology s assumed to be Cobb-Douglas form: A BK L A, where K K and L L. We extend ths two-regon model by allowng the nterregonal captal flows. We assume the Center- Perphery relatonshp between the regons, where the total amount of economy s savngs s beng redstrbuted among the regons n the form of nvestment n some fxed proporton. We further assume that the fnancal system of one regon manages to attract only a constant fracton of aggregate savngs. Themodfed nvestment rule s n the smple lnear form: I1 I, where I I s the total level of nvestment n the economy. In the two-regon case the total level of nvestment thus can be expressed through the levels of regonal nvestments respectvely: I1 I 2 (1 ) I. In turn each of the regon s nvestment s and I (1 ) sy respectvely. 2 I 1 sy We now consder two possbltes: constant and changng. In frst case we the steady-state growth rate of the outputs n each regon s the same n both regons and equals the usual result of ths type of model: technologcal growth plus populaton growth: g g * g * n. K K 1 * 2 Snce and grow at the same rate n the long run, then ther sum, K, wll grow at the same rate, or puttng t n a formal way gk * g * * 1 K g 2 K. So the constant nvestment rule does not affect the long-run steady state growth rate of the economy. What about the levels? To answer ths queston I use the computer smulaton.fgure 1 represents the change of the per capta outputs of the regonal economes over tme. It s clear that the model wth constant φ predcts dvergng levels of per capta outputs. We now consder one more extenson of the model. Now nstead of a constant φ we consder a dynamc φ. So to model ths stuaton we assume that the growth rate of the fracton of the total savngs that s allocated by the local fnancal system s defned by some functon of the fnancal development (F) : (F). A t Regon A Regon B Fgure 1. Regonal per capta output for a model wth constant φ That s n the Center-Perphery relatonshp Center regon starts attractng more and more savngs nto t s nvestment proects and n the long run receves total economy s nvestment. As we can see the dvergence between the regons s much more pronounced n ths case. Ths s mostly due to the fact that n ths scenaro unlke n the prevous one the growth rates of per capta outputs are also dvergng nstead of convergng. Let s now assume we have N regons. Some of them are Central and some are Perpheral. We are nterested n the queston f the dfference n the development of the regonal fnancal system can explan the dfference n the growth rates n the regonal economes. Usng the same 107

3 Output per capta Наукові праці. Економіка settng of the model as prevously, except for the fact that we have now N regons, we can show that as long as φ and φ are changng over tme, the dfference n the regonal per capta output growth rates wll be proportonal to the dfference n the growth rates of the correspondng regonal g g ( g g ) g g nvestment ratos. Y / L, Y / L, K K t Regon A Regon B Fgure 2. Regonal per capta outputs We have two man results. Frst, s that f we have a Core-Perphery type of relatonshp between the two regons (modeled on the level of ther fnancal sectors), then we get a long-term dvergence of ther output growths. The mult-regonal extenson shows that f we have two smlar-n-structure regons, then the dfference n ther output per capta growth can be explaned by the dfference n the fnancal development. The mult-regonal model suggests that the two regons growth rate dfferental can be explaned by the dfferental n the growth rate of ther respectve portons of the total regonal group nvestment g Y g Y,where L L λ s some coeffcent of proportonalty. For the notatonal convenence we change for g g Y g Y for gy L L 1, and. Thus, addng the dsturbance, we can rewrte the equaton as a stochastc model: gy 1 2 g. To test the model I am usng data on 48 US states (excludng Alaska, Hawa and DC) over the perod of (24 years). There are two maor sources of data: Bureau of Economc Analyss (BEA) and Federal Depost Insurance Corporaton. The nvestment orented bank loans (IOBL) are calculated as the sum of loans, secured by real estate, loans for agrcultural producton, commercal and ndustral loans, and loans to ndvduals. The porton φ s calculated by dvdng the IOBL n the state to the total amount of IOBL n the correspondng Census regon. One of the reasons why the data of the Unted States can be used to test the model s the regonal bank regulaton. One of the key model s assumptons s closed economy. It s assumed that there are no fnancal outflows and nflows nto the connected regons and the totalty of the savngs are redstrbuted nto the nvestment wthn the same group of regons. The exstence of the bankng regulaton n the Unted States to some extent created ths stuaton, when such assumpton s not far from realty. There are three possble regulatons: ntrastate branchng, nterstate bankng, and nterstate branchng. Followng Stroh and Strahan (2003) we use two sets of dummes: for the ntrastate branchng deregulaton effects and for the nterstate bankng deregulaton effects [11]. The dependent and ndependent varables are expressed as growth dfferentals between pars of states. So now we need to create the pars of states to get the data sample. Two samples of state pars are desgned. The multregonal extenson of the two-regon model assumes Center-Perphery (C-P) relatonshp between the states wthn a Census dvson. In order to form the pars, we need to classfy the states as ether Center or Perphery. As t has been dscussed earler, the man characterstcs of the Center regon are:1) hgher level of per capta output and 2) more developed fnancal system. The frst sample conssts of 38 pars of states. Center regon s chosen n each of the Census regons and then pared wth the rest of the states n the correspondng regon. Ths sample was desgned to nclude most of the US states, so that t enables us to test the model n a more general case. The choce of the center regons was based on the fnancal classfcaton: the rato of employment n the fnancal sector to the total populaton of the state. At the same tme the maor metropoltan areas were taken nto consderaton. Perphery states show faster growth rage, averaged over the sample perod, whch s consstent wth the theoretcal and emprcal fndngs of convergence of states per capta ncomes. The second sample conssts of only 9 pars, whch correspond to each of the Census regons. The choce of the 108

4 Випуск 263. Том 275 Center regons for ths sample stayed unchanged. The dfference s that nstead of parng all the states n the regon, the average of the Perphery states s computed and then the dfference between the Center and the «average» Descrptve statstcs for the frst sample (38 pars) Perphery for each Census regon s taken. The descrptve statstcs for each sample are presented n the followng tables Varable Mean Std Dev Varance Mnmum Maxmum Δgy -0,0016 0,0254 0,0006-0,2859 0,1176 Δgφ -0,002 0,1029 0,0106-1,1718 0,6967 Table 1 Descrptve statstcs for the second sample («average» Perphery) Varable Mean Std Dev Varance Mnmum Maxmum Δgy 0,0035 0,0459 0,0021-0,0861 0,1488 Δgφ -0,0082 0,1122 0,0126-0,3159 0,6998 Table 2 The estmaton results of the model usng the frst sample are presented n Table 3 below. Estmaton results for the frst sample OLS OLS wth fxed effects 2SLS 2SLS wth fxed effects Constant -0,0023-0,0097* -0,0038* -0,0193* (-1,6413) (-1,7284) (-1,7721) (-1,6918) Δ gφ 0,0813*** 0,0883*** 0,1335** 0,1973** (3,5030) (3,6774) (2,3375) (2,0057) Dummy1 0,0029 0,0058** 0,0041* 0,0109* (1,5523) (2,1067) (1,7039) (1,8671) Dummy2-0,0015-0,0028-0,0014-0,0038 (-0,9014) (-1,4777) (-0,7254) (-1,3478) Δ gφ *Dummy1-0,0551** -0,0555** -0,1030* -0,1514* (-2,2362) (-2,1776) (-1,8982) (-1,7035) Δ gφ *Dummy2 0,0126 0,0087 0,0191 0,0181 (0,8745) (0,5777) (1,0092) (0,7920) Δ gy (-1) 0,0637** 0,0426-0,4465-0,9657 (2,0392) (1,3360) (-0,8972) (-1,1307) Sample sze R 2 0,04 0, * sgnfcant at 10 %; ** sgnfcant at 5 %; *** sgnfcant at 1 %. The t-statstc s gven n the parentheses. The R 2 s not reported for the 2SLS estmatons because of statstcal ncomparablty wth that, calculated for the OLS. Estmaton results for the second sample Table 3 The estmaton results of the model usng the second sample are presented n the table blow. OLS OLS wth effects 2SLS 2SLS wth effects Constant 0,0115*** 0,0079* 0,0119*** -0,0059 (4,0040) (1,6615) (4,0359) (-0,6687) Δgφ -0,0287 0,0578*** -0,0369 0,0972*** (-1,0138) (2,8797) (-1,1928) (3,0985) Δgy(-1) 0,5714*** 0,2165*** 0,6111*** -0,4785 (8,1246) (3,1434) (6,5948) (-1,3647) Sample sze R2 0,28 0,78 * sgnfcant at 10%; ** sgnfcant at 5%; *** sgnfcant at 1 %. Table 4 For the frst sample (38 pars) the coeffcent on the Δ gφ s postve as expected n all specfcatons. For OLS t s hghly statstcally sgnfcant, and less sgnfcant, but stll wthn 1 5 % probablty range, for 2SLS. Under the hypothess, that OLS gves nconsstent estmates, we can conclude, that t underestmates the effect of Δ gφ. So we get 0,13 % (0,08 % n case of OLS) ncrease n the C-P per capta output growth dfference as a result of 1 % ncrease n the C-P dfferences n growth rates of porton of the total nvestment orented loans, on average, ceters parbus. Note that the change of 1 % represents the value of the level change of the dfference, (snce both dependent and ndependent varables are measured n per cents) and not change as a percentage of the ntal value. The deregulaton effects are nsgnfcant but the nteracton term on the frst dummy (nterstate bankng deregulaton) 109

5 Наукові праці. Економіка gves a sgnfcant coeffcent wth negatve sgn, as expected. So the deregulaton of ntrastate bankng decreases the level of C-P relatonshp by 0,05 % of the dfference n growth rates as reported by OLS, and 0,10 % as reported by 2SLS. That means that after the ntrastate branchng deregulaton, the effect of the Δ gφ on the dfference n the growth rates of regonal ncomes per capta decreases to 0,03 % as reported by both estmates. The ncluson of the par-specfc state effects ddn t nfluence the dfference n the effect of Δ gφ as reported by OLS. But ths dfference s more sgnfcant n the case of 2 SLS estmaton: 0,197 from 0,133. The net effect of the Δ gφ after the deregulaton, as estmated by 2 SLS, ddn t change sgnfcantly. For the second sample (9 pars) the estmated effect of Δ gφ s nsgnfcant n the specfcaton wthout parspecfc fxed effects, but becomes very statstcally sgnfcant once the models are augmented to nclude them. Accordng to the results, 1 % growth n dfference n the growth rates of φ ncreases the dfference n the growth rates of real per capta ncomes by 0,097 % (0,058 % n case of OLS), on average, ceters parbus. The results reported by both estmates are wthn the range of beforeand after-deregulaton effects of Δ gφ, estmated from the model specfcatons for the frst sample. Snce the model specfcatons for ths sample does not nclude the deregulaton dummes, so that mght average the effect over the whole sample range, whereas the specfcaton for the frst sample (38 pars) allows for the change of the effect once the bank branchng deregulaton was enacted n one of the states n the par. Incluson of the spatal effects (par dummes) nto the models shows that n there s hgher degree of heterogenety among the «averaged» C-P pars, then between the pars n the frst sample. The frst sample ncludes a lot of neghborng pars of states, where as the second ncludes only nne regon «averaged» pars. Conclusons and suggestons for future research. The man goal of ths research on the one hand was to derve more evdence for the fnance-growth nexus dscusson, and on the other to fnd the explanaton for the dfferences n the regonal development n the dfferent levels of fnancal development. A growng lterature provdes both theoretcal and emprcal evdence n favor of the nfluence of the fnancal development on the economc growth. We developed a two-regonal model and ts multregonal extenson that s based on the endogenous growth model. We dropped the perfect captal moblty assumpton and used Center-Perphery type of relatonshp between the two regons developed by Dow [4]. To ntroduce the role of the fnancal development nto the model we follow Kang and Sawada and augment the smple endogenous growth model wth two endogenous factors captal and technology [9] wth the nvestment dstrbuton rule: the total pool of savngs n the two regons s redstrbuted nto the nvestment nto correspondng regons n some proporton, whch s defned by the qualty of functonng of ther regonal fnancal systems. We assume that Center type of regon has a more developed fnancal system. That s why t gets the larger porton of the total nvestment. The case wth the fxed proportons showed that t doesn t nfluence the relatve regonal growth rates. That s why a dynamc nvestment dstrbuton rule was ntroduced, where the relatve porton of nvestment nto each regon s changng over tme. When the porton of the relatve nvestment s defned endogenously, then t nfluences the relatve regonal growth resultng n dvergence. The mult-regonal extenson of the model showed that f the two smlar n structure regons are growng at dfferent rates then the dfference can be explaned n part by the dfference n the fnancal development. We test the result usng data on 48 US states. Usng the US Census Bureau regonal dvson, we defne 9 groups of states, whch correspond to 9 census regons. For each of the regons we defne the Center state and then par t wth all other states n the group, defnng thus the Center-Perphery pars. Among our emprcal fndngs are the followng. Frst, we fnd statstcally sgnfcant assocaton between the dfference n the fnancal development and dfference n the economc development among US regons, estmated for the two specfcatons that we used for two samples. Second, the ntrastate branchng deregulaton proved to have negatve effect on the strength of relatonshp of nterest. The nterstate bankng deregulaton turned out to have nsgnfcant effect, despte the theoretcal expectatons. Thrdly, the ncluson of the spatal effects nto the models showed some dfference n the estmaton of the effect. Ths reveals the spatal heterogenety of the fnance-growth relatonshp and stresses the mportance of further development of the exstng models n ths drecton. And fnally, one of the mplcatons of the emprcal part s that one can use the data of the developed countres to develop and test theoretcal models based on the assumptons whch are more realstc for the current stuaton n the developng countres and countres n transton. As argued by Goldsmth, the possblty of any emprcal work n the feld of fnance-growth nexus rests on the assumpton that there s unversal path of fnancal development, and dfference n the countres (whch could be extended to regons of a partcular country as well) fnancal development s presented as ther dfferent relatve locaton along ths path. In ths research the development of the theoretcal model was restng on the Center-Perphery type of relatonshp, more commonly experenced by the regons of some developng economes rather than economes wth almost frctonless fnancal and captal markets, such as US. But the hstorcal condtons, whch created regon-dstnct bankng system, mmc the assumptons of the model and thus provde groundng for the emprcal work conducted. The future research should focus more on the data for developng countres. More data s beng collected by the natonal statstcal agences on the fnancal sector whch wll enable the type of research for these countres. REFERENCES 1. Borschevsky V. V. Foregn nvestment as a factor of regonal development // Fnances of Ukrane P

6 Випуск 263. Том Demrgüç-Kunt A., Maksmovc V. (2000). Fundng growth n bank-based and market-based fnancal systems: Evdence from frm-level data. World Bank mmeo. 3. Demrgüç-Kunt A., Levne R., World Bank. Polcy Research Dept. Fnance and Prvate Sector Development Dvson. (1995). Stock market development and fnancal ntermedares: Stylzed facts. Washngton, D. C.: Fnance and Prvate Sector Development Dvson, Polcy Research Dept., World Bank. 4. Dow S. C. (1999). Fnancal deregulaton, bankng competton and regonal development: The spansh experence. ERSA conference papers 5. Goldsmth R. W. (1969). Fnancal structure and development. New Haven: Yale Unversty Press. 6. Kang S. J., Sawada Y. (2000). Fnancal represson and external openness n an endogenous growth model. Journal of Internatonal Trade and Economc Development, 9. P Patrck H. T. (1966). Fnancal development and economc growth n undeveloped countres.economc development and cultural change, 14(2). P Raan R. G., Zngales L. (1998). Fnancal dependence and growth.the amercal economc revew, 88(3). P Romer, D. (2005). Advanced macroeconomcs (3rd ed.)mcgraw-hll / Irwn. 10. Schumpeter J. A., Ope R. (1962). The theory of economc development : An nqury nto profts, captal, credt, nterest, and the busness cycle. Cambrdge, Mass. : Harvard Unversty Press. 11. Stroh K. J., Strahan P. E. (2003). Compettve dynamcs of deregulaton: Evdence from U. S. bankng. Journal of Money, Credt, and Bankng, 35(5). Р В. В. Ханжин, Чорноморський державний університет ім. Петра Могили, м. Миколаїв, Україна РОЛЬ ФІНАНСОВОЇ СИСТЕМИ У ПОДОЛАННІ НЕРІВНОМІРНОСТІ РЕГІОНАЛЬНОГО РОЗВИТКУ КРАЇНИ Це долідження використовує просту модель ендогенного розвитку як основу для побудови моделі з двома регіонами, які пов язані між собою через їх регіональні фінансові системи. Ми моделюємо вплив фінансового розвитку на регіональне зростання та розширюємо модель для випадку із багатьма регіонами для того, щоб можна було використати теоретичну модель у емпіричному аналізіна основі статистики США. Не дивлячись на те, що нас в першу чергу цікавлять моделі, які здатні пояснити нерівномірний розвиток у країнах, що розвиваються, модель краще за все тестувати, використовуючи дані з розвиненої країни, через повноту таких даних. У цьому дослідженні ми пропонуємо використовувати дані по штатах США, оскільки у цієї країни особлива історія розвитку банківскього (та фінансового) сектора. Особливість цього розвитку полягає у жорсткому регіональному регулюванні банківскої діяльності в середині кожного штату та між штатами. Ключові слова: регіональний розвиток; зв язок «фінанси економічне зростання»; ендогенна модель економічного зростання; фінансовий розвиток. В. В. Ханжин, Черноморский государственный университет им. Петра Могилы, г. Николаев, Украина РОЛЬ ФИНАНСОВОЙ СИСТЕМЫ В ПРЕОДОЛЕНИИ НЕРАВНОМЕРНОСТИ РЕГИОНАЛЬНОГО РАЗВИТИЯ В СТРАНЕ Это исследование использует простую модель эндогенного развития как основу для модели с двумя регионами, которые связаны между собой через их региональные финансовые системы. Мы моделируем влияние финансового развития на региональный рост и расширяем модель для случая с многими регионами для того, чтобы можно было применить теоретическую модель в эмпирическом анализе на основе статистики США. Несмотря на то, что нас интересует в первую очередь модели, которые способны объяснить неравномерное развитие в развивающихся странах, модель лучше всего тестировать, используя данные из развитой страны в виду полноты таких данных. В этом исследовании мы предлагаем использовать именно данные по штатам США, поскольку в этой стране необычная история развития банковского (и финансового) секторов. Особенность этого развития лежит в строгом региональном регулировании банковской деятельности (в пределах каждого штата и меж-штатные отношения). Ключевые слова: региональное развитие; связь «финансы-экономический рост»; эндогенная модель экономического роста; финансовое развитие. Ханжин В. В.,