Banks and Regional Economic Development

Abstract

Economists are still groping for an explanation of economic growth processes, particularly the processes that will help underdeveloped countries. Regional economic growth in the United States is a special case of a more general growth process, and what causes regional economic growth is also debated [3; 4]. Moreover, the role that money plays in the growth process for developing countries as well as in regions of countries is open to question.' There has been little effort to measure regional financial flows and to discover the role that financial markets and institutions play in regional economic growth. This is so partly because of the paucity of data on money capital flows on a regional basis but mostly because money capital markets are assumed to be perfect in most regional models and therefore not a significant deterrent to growth per se. For example, regional interest rate differentials are usually attributed to information cost rather than capital immobility [15]. Thus, while the supply of saving is given a critical role in regional growth models [13, 28] the concomitant roles of monetary phenomena in the guise of availability of funds and/or the structure of financial institutions rightly or wrongly are ignored or given minimal consideration [13, 38, 72]. This is unfortunate since much public policy, e.g., liberal branching laws, is based on the assumption or implied evidence that banks and bankers are a significant influence in the regional and/or state growth process (e.g., see footnote 6).2 With the concern over regional growth in the United States that developed in the 1960s, some interest developed in regional finance. The Checchi Study [1] was commissioned by the Appalachian Regional Commission because of the lack of information about subregional financial flows and structures. Studies on the role of banks in the growth of the South have been made although these have serious limitations when applied to relatively small regional areas.3 Income and employment multipliers have been computed by Miernyk, et al. for in West Virginia in their input-output study Simulating Regional Economic Development [9]. These and most other studies have failed to look at subaggregate bank data and at the individual bank and banker to see how regional growth is affected at the micro level. This paper attempts to broaden our knowledge of how countywide financial flows and banker behavior influence economic growth in specific parts of Appalachia and to test a variety of hypotheses about this relationship. The findings suggest that it is unlikely that banks or bankers play a significant or distinct role in regional growth. This conclusion is circumscribed by the difficulty found in the study of isolating the banking role in regional growth from a myriad of possible growth determinants.