Reconfiguration of Financial System Elements to Restore Economic Growth: The System Simplicity and Transformation towards State-Based and Corporate-Based Types

Abstract

Highlight The analysis indicates that credit in general have been driving the long-term economic growth more than diversity of financial systems or financial innovations. However, the driver becomes a drug as GDP growth needs a several times faster growth of credit. The scholastic review of the traditional system characteristics (functional, intermediation, institutional) stresses the characteristics as different sides of one coin and the characteristics conventional simplicity cannot explain the system little contribution to economic growth. The research also stresses practical complexity of the financial system, not only the problematic of "too-big-to-fail" banks, but also interrelations of such seemingly uncorrelated natural and social disasters as the Iceland volcano and the Arab Spring, Obama care and military tensions in Ukraine. Conventional market-based or bank-based approaches are criticized as staying too far from primary distribution of money by corporate finances and secondary redistribution by public finances, based on statistics of fixed capital investments and its sources. The article collects opinions and evidences that the financial system simplicity should become a conventional trend combined with the financial instruments approach. The only few leading financial instruments should be offered widely, but others should service the niches to decline an excessive burden of the financial sector for economies. The important contribution of public finances to long-term economic growth is not only visible by sovereign borrowings and infrastructure investments, but also by income redistribution, optimization of consumption and maximization of output by the current budget. The article also collects the evidences and explanations that large non-financial corporations effectively invest in fixed capital and support credit sales without real financial intermediation, and also that many financial services are now provided by IT companies without banks. Problem set and research methodology Financial system, the system types and elements and the country specific features are one of the most popular topics for scientific articles. At the same time, the publications rarely stress the reality that financial system is neither the economic driver, at least in 2008-2016, nor the accumulator of financial sources for economic growth. The mainstream economic thought points that major economies face cyclical crisis, not systematic, and only the time is needed. Economic history of the 20th century shows that financial systems of major economies changed noticeably during every financial crisis and economic cycle. Such system elements as commercial banks, financial markets, public budgets, corporate finance practices fundamentally act without any significant changes. However, economies are really driven by few of the most influential financial institutions and financial instruments, which have been changing from one generation or a long economic cycle to another. Hence, providing many historic analogues of the past transformation of financial system seems to be an important illustration of modern challenges and proposed shifts. The bulk of literature is written about the financial system nature and its role, about two conventionally popular market-based and bank-based models, as well as about the system complex approach. The review of such literature forms a first third of this article and allows shaping the analytical approaches to another proposed system types, such as state-based and corporate-based. Avoiding a wide observation of conventional thought, only several articles were segregated for the review, either from the respective international finance organizations or highly ranked by citations. Financial system has been developing by bright economic events. Thus, the article mainly interprets them and specifies their influence, along with the system shift to unconventional state-based and corporate-based types. …