Private Sector Credit Research Articles

The State of China’s Economic Miracle

The State of China’s Economic Miracle Kellee S. Tsai (bio) What are the sources of China’s breathtaking economic growth since the late 1970s? The answer is encapsulated in the title of Nicholas Lardy’s most recent book, Markets over Mao: The Rise of Private Business in China. It’s the private sector. In 1978, state-owned enterprises generated three quarters of China’s industrial output. Today they account for only one quarter. Besides displacing state firms in terms of industrial output, private firms now produce nearly 90% of the country’s exports, are far more profitable than state firms, and employ a growing share of the urban workforce. Markets over Mao methodically combs through over three decades of government statistics to demonstrate, with empirical confidence, the remarkable expansion of China’s private economy. Lardy provides a valuable service to those daunted by how to triangulate among internally inconsistent sets of official Chinese data, with their shifting categories of firm ownership and reporting practices. The third chapter of Markets over Mao is especially instructive in delineating the seven major types of firms, including explanations of the five subcategories of private firms. Of particular interest, Lardy alerts us to enterprise lending data released by the People’s Bank of China starting in 2011, which identifies the majority or dominant ownership stakes in limited liability companies and shareholding limited companies. Some are primarily owned by state entities, while private shareholders have majority or dominant stakes in others. Yet private shareholder-dominant companies are not typically included in calculating the size, economic contributions, and financial indicators of the private sector. Hence, a recurring cautionary message in Markets over Mao is that relying on official registration status in statistical yearbooks underestimates the true scope of China’s private economy. Markets over Mao goes beyond serving as a statistical roadmap for number crunchers, however. The book boldly argues that China should not be regarded as state capitalist. This claim rests on three main observations. First, the private sector is growing and outstrips state firms in multiple performance indicators, including return on assets. Second, China’s [End Page 144] private sector is not as credit-constrained as most people think. Third, and relatedly, the bulk of the government’s 2008–9 stimulus funds were not disproportionately invested in the state sector. The first observation is uncontroversial. Economists and other dedicated observers of China’s political economy agree that the private sector is more dynamic and profitable than the state sector, even as state-owned giants grab news headlines. The second and third claims, however, warrant further reflection. Readers may be surprised by the book’s argument that most accounts of China’s private sector exaggerate its financing challenges. Lardy points out that the preponderance of investment in reform-era China has been financed by retained earnings rather than by bank credit or equity markets. During the 1990s, about 40% to 50% of investment in nonfinancial corporations came from retained earnings; and the ratio reached an average of 71% during 2002–8. The private sector has been particularly reliant on retained earnings due to its higher rates of productivity and “more limited access to bank credit” (p. 97). However, Lardy quickly discounts the latter issue by contending that the private sector receives more bank loans than normally recognized—and actually received a growing share of bank loans during the stimulus years. He estimates that in 2012, 44% of all loans outstanding went to the private sector, an increase from 35% in 2009. As detailed in “Appendix A: Alternative Measures of Private Sector Credit,” this calculation includes not only loans to private firms and individual businesses but also business loans to rural households, consumption loans to households (including mortgages), and firms where the dominant shareholder is private. Including these additional loans shows that between 2010 and 2012 private firms accounted for 52% of new lending, whereas state firms received only 32% (p. 104).1 Markets over Mao states decisively, “Chinese private firms now enjoy better access to credit than in any previous period in the reform era” (p. 108). Why, then, does the conventional wisdom persist that private businesses in China face a structural financing gap relative...

An Empirical Study of the Relationship between Islamic Modes of Finance and Financial Intermediation

Islamic modes of finance become new phenomenon in financial system. Islamic modes of finance are designed to facilitate financing by the principles in Islamic Sharia, such as mudarabah, musharaka and sukuk. In addition financial intermediation is an important indicator of economic development as well as economic growth.The objective of this study is to determine the relationship between Islamic modes of finance and Islamic financial intermediation by using case study of Malaysia, Indonesia and Jordan. This study employed fixed effect and random effect through time series data from 2001-2010 for both Malaysia and Indonesia. Liquid liabilities, private sector credit and Islamic modes of finance such as mudarabah, musharakah, murabaha, istisna,ijarah used as independent variables that expected to be influence Islamic financial intermediation as well as economic growth. Findings show that Islamic mode of finance which include murabaha, musharakah, mudarabah, istisna, ijarah. While, private sector credit as well as liquid liabilities are not affect Islamic financial intermediation.

The impact of financial integration in Botswana

This study examines the impact of financial integration in Botswana. Direct and indirect transmission channels to growth are investigated. Financial integration commonly influences growth through encouraging cross border capital flows, transferring technologies and managerial expertise and promoting risk sharing. These market developments that are realized translate into enhanced access to finance as intermediation channels improve. Our empirical results are in line with previous literature in that financial depth does occur in the wake of the financial integration era and positively influences growth in Botswana. Not withholding, our results reveal that market depth has not promoted access to private sector's credit in Botswana so far. To a larger extent, a negative impact of financial integration on growth is observed as there could be short-term risks associated with increased financial openness. Nonetheless, an indirect, significant and positive influence from financial integration through financial access to growth is also observed. This indirect transmission demonstrates that financial integration increases financial innovation which in turn fosters growth in the country. Financial innovation enhances service delivery and improves access to financial services. We observe a positive influence from macroeconomic and institutional variables implying prevalence of sound and prudent supervisory structure and the rule of law in Botswana. Policy wise, there is still need and scope for greater financial integration, financial development and financial access which can contribute to national development goals of sustainable economic growth, diversification, employment creation and poverty reduction in Botswana.

Restraining Credit Growth: The Case of Bulgaria

The study assesses the effects of the measures that the Bulgarian central bank gradually adopted to restrain the credit growth. We answer the question what would have been the financial flows to the non-government sector if there were no measures. We use ARIMA models for forecasting the credit to the private sector. The study indicates several effects from the measures: a reduction of the banks' credit volume, a deterioration of the informative value of the monetary statistics, a sharp increase of the importance of the non-bank credit, a restructuring of the private sector credit, and increased dependence on external financing.

The interaction between globalization and financial development: new evidence from panel cointegration and causality analysis

The paper studies the impact of globalization on financial development in a sample of 32 developed and developing economies over the period 1989–2012. Indicators of financial development include three banking indicators (private sector credit, domestic credit, and liquid liabilities) and three indicators of stock market development (value traded, turnover ratio, and stock market capitalization), all relevant to GDP. Two panel estimation methodologies are under consideration: panel cointegration and panel VAR. The findings reveal that financial development affects economic growth and globalization positively. Globalization helps mobilize economic growth, but does not help financial development as it helps increase access to external financing. Quality institutions do not impact financial development although the latter increases incentives for better quality institutions in support of sustainable growth.

Inequality, credit and financial crises

In the three decades leading up to the financial crisis of 2008/09, income inequality rose across much of the developed world. This has led to a vigorous debate as to whether widening inequality was somehow to blame for the crisis by driving private sector credit booms. Despite growing interest, empirical evidence on an inequality– fragility relationship is limited. Based on a panel analysis of 18 OECD (Organisation for Economic Co-operation and Development) countries for the years 1970–2007, this study provides evidence of a positive relationship between income concentration and private sector indebtedness, once other traditional drivers are controlled for. If confirmed, the implications of this result are as follows: (i) the view that the distribution of income is irrelevant to macroeconomic stability, as implicit in mainstream approaches, needs further investigation; and (ii) in order to make the financial system more robust, policy makers should cast the net wider than monetary policy and regulatory reforms and consider the effects of changes to distributive patterns.

Excessive credit growth or the catching up process: The case of central, eastern, and southeastern European countries

Most CESEE countries had an impressive credit growth prior to the outbreak of the financial crisis in 2008. Nevertheless, that experience has taught us that the strong expansion of private sector credit must not be ignored. In an attempt to investigate whether the rapid credit growth was a result of the catching-up process or was a risky process with well-known consequences, we performed empirical analysis by applying statistical (HP filter) and econometric (pooled OLS, fixed effect OLS, and PMG) approaches. The empirical results of both out-of-sample and in-sample approaches suggest that in the pre-crisis period excessive credit growth in terms of higher actual than estimated credit growth was recorded for the majority of the countries observed. Compared to the out of-sample approach, in-sample estimates, which turned out to be more reliable, indicate that the pre-crisis growth was less pronounced and that over the post-crisis period actual credit growth fluctuated around the estimated growth, pointing to the fact that the former was in line with movements in its fitted values.

Optimal Monetary Policy at the Zero Lower Bound

We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash and cannot participate in the credit market. The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction. For sufficiently large and persistent negative shocks the zero lower bound on nominal interest rates may threaten to bind. The monetary authority may credibly promise to increase the price level in this situation to maintain a smoothly functioning (complete) credit market. The optimal monetary policy in this model can be broadly viewed as a version of nominal GDP targeting.

Impact of banking institutions on national economy an empirical study of time series analysis in Pakistan

This paper examines the long and short term relationship of financial sector development on economic growth of Pakistan where development of financial sector is detected by the variables truly depicts the efficiency of financial sector i.e. Money Supply, size of Advances, Private sector Credit growth and Bank’s equity with economic growth which is pronounced by Gross Domestic Product in this study. Data of almost 22 years ranges from 1992 to 2013 of overall banking industry is taken to obtain results by employing Johnson and Jusellious co integration technique to detect long run association while Granger Casualty test is used to determine cause and effect relationship and to measure short term dynamics Vector Error correction model is used. The result shows that both long and short run relationship exists between growth of financial sector and economy of Pakistan.

The Target and Achievements of Private Sector Credit in Bangladesh: A Monetary Policy Analysis

This paper tries to assess the monetary policy on macroeconomic indicators in Bangladesh. The central bank declares monetary policy statement twice in every year to pursue its macroeconomic goals. The assessment provides that during the sample period, monetary policy is not strong enough to control the inflation rate. In addition, policies did not appear itself as ignition to the investment process as well as the growth rate of GDP. This assessment leaves an interesting outcome: monetary policy is not independent and strong enough to pursue its macroeconomics goals. JEL Classification Code: M51, M52

Credit Booms, Banking Crises, and the Current Account

A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

Output Recovery after Financial Crises: An Empirical Study

:In this paper, we provide a characterization of output recovery after financial crises. Using data from eighty-one countries (regions) from 1975 to 2008, we first identify 182 currency crises by a modified EMP method and recognize 131 banking crises using the results from literature. With quantitative U-shaped and V-shaped recovery specified, we depict output recovery over the dimensions of output loss and duration and find that emerging markets tend to experience severe crises with speedy recoveries. Finally, we apply survival analysis to study the duration of recovery. The results indicate that certain factors, such as control of private sector credit, the degree of financial openness, and adjustment of the current account deficit, contribute to a speedy recovery after financial crises.

Bank Credit and Economic Growth in Nepal: An Empirical Analysis

This study examines the impact of commercial bank credit to the private sector on the economic growth in Nepal from supply side perspectives. The study has applied Johansen co-integration approach and Error Correction Model using the time series data for the period of 1975-2014. The empirical results show that bank credit to the private sector has positive effects on the economic growth in Nepal only in the long run. Nevertheless, in the short run, it has been observed a feedback effect from economic growth to private sector credit. More specifically, the growth in real private sector credit by 1 percentage point contributes to an increase in real gross domestic product by 0.40 percentage point in the long run. The empirical results imply that, policy makers should focus on long run policies to promote economic growth – development of modern banking sector, efficient financial market and infrastructure so as to increase the private sector credit which is instrumental to promote growth in the long run.

English

This research paper examines the impact of inflation with M2 (broad money) and private sector credit in Pakistan and helps to forecast inflation and its affect in Pakistan during the year 1975 to 2008. Inflation is defined as too much money chasing too few goods. Inflation leads to high prices and that affect all mechanism of the market. The rate of inflation is an important macroeconomic indicator that can affect the economic growth. Inflation was in lime light throughout the year, as the rise of global inflation witnessed during the most part of 2008. This paper finds out that an increase in money supply over long-run results in higher rate of inflation. Thus it establishes that inflation is essentially a monetary phenomenon. The results indicate that monetary factors have played a dominant role in recent inflation. Changes in wheat support price influence inflation in short-run, but not in long-run. Thus by using data from 1975- 1976 to 2007-2008 period, applying Augmented Dickey-Fuller tests, its finds that the most important determinants of inflation in 2007-2008 were adaptive expectations private sector credit and rising import prices whereas fiscal policy's contribution to inflation was nominal. Analysis of price multiplier indicates that increase in wheat procurement prices have relatively small effects on overall price levels.

Analyzing Private Sector Credit Growth in Ghana

In this paper, we define a credit boom as an episode during which real private sector credit growth exceeds the level typically attained during a normal business cycle expansion. We employ HP filter to disaggregate real private sector credit into its trend and cyclical components and use 1.5 standard deviation of the cyclical component to establish thresholds for identifying credit booms in Ghana. Two episodes of credit booms (1974-76 and 1988-89) and two episodes of rapid credit growth (1986 and 2000) were identified broadly underpinned by accommodative monetary policy. This finding should provide an early warning signal to policy making since excessive credit growth has had destabilizing consequences on the health of the banking sector.

The Relationship between Financial Development and Economic Growth in Africa

This study examines the relationship between financial development and economic growth. It presents evidence on a cross section of 50 African countries whose data is available for the period 1980-2008. Two proxies of financial development are employed: the ratio of credit to the private sector to total GDP and the ratio of broad money (M2) to total GDP. We establish a positive relationship between financial development and economic growth. However, we find that the relationship between private sector credit and economic growth is much stronger than the relationship between money supply and economic growth. In addition, we find that the relationship between financial sector development and economic growth is bi-directional. The results suggest that both the financial sector and the real sector are important in influencing Africa’s current and future growth trajectory.

Financial Institutions’ Operations & Capital Flight In Nigeria

This study examines the impact of Financial Institution variables and operations on the level of capital flight in Nigeria for a period of forty two years. The financial institutions globally are expected to perform certain fundamental functions that are believed to the prerequisites for economic growth and stability. Required secondary data were sourced from the Central Bank of Nigeria statistical bulletin, the Nigeria Stock Exchange fact books and IMF financial reports while the Ordinary Least Square Method of Regression analysis and Co-integration Technique were employed to estimate and test the impact of selected economic and financial institutions’ variables such as the prevailing Deposit Rate, Private Sector Credit, Change in Net Foreign Asset of Domestic Financial Institutions, Inflation Rate, Gross Capital Formation and Nigeria and U. S interest rate differentials on the level of capital outflow from Nigeria. With the World Bank and Erbe (1985) capital flight estimate, the findings reveal that all the explanatory variables are significance in explaining the behavior of capital. The results also show that each of the explanatory variables has specific impact on the dependent variable. Specifically, high inflation rate induces capital flight, increase Gross Capital Formation (LGCF) reduces capital flight, and appreciable deposit rate on bank deposit encourages domestic savings while the Credit to Private sector has not brought about the desire expectation of improving and sustaining the domestic economy. The study recommends that government should provide an enabling environment that will enhance the ability of the financial institutions to perform their functions effectively and the private individuals to invest in the domestic economy profitably. While financial institutions managers and operators should adhere to the sound ethical practices and desist from shape practices that encourage illegal transferring of money.

Processes of economic development: case of Lithuanian real estate sector

The enlargement of the EU has impacted development of housing market in Lithuania as well as in other Central and Eastern countries. The country was significantly influenced by favorable landing and expansion of private sector credit. Hence, Lithuania experienced the period of the financial and asset price boom, which was followed by economic downturn, and consequently, the burst of price bubble. This paper aims to reveal relationships among demand and supply side determinants and housing prices. Hence, the question is being raised if fundamental determinants affect housing prices. The growing dependence of Lithuania on energy resources leads us towards another research question. We will test if housing prices are linked to energy prices. Regression analysis tool, we believe, allows revealing if fundamental determinants are equally important.

Sovereigns versus Banks: Credit, Crises, and Consequences

Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper examines the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies significant financial stability risks have mostly come from private sector credit booms rather than from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. We uncover three key facts based on our analysis of around 150 recessions and recoveries since 1870: (i) in a normal recession and recovery real GDP per capita falls by 1.5 percent and takes only 2 years to regain its previous peak, but in a financial crisis recession the drop is typically 5 percent and it takes over 5 years to regain the previous peak; (ii) the output drop is even worse and recovery even slower when the crisis is preceded by a credit boom; and (iii) the path of recovery is worse still when a credit-fueled crisis coincides with elevated public debt levels. Recent experience in the advanced economies provides a useful out-of-sample comparison, and meshes closely with these historical patterns. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.

Labor Market Issues in the Caribbean: Scope to Mobilize Employment Growth

The paper examines the determinants of employment growth, drawing on data available across a sample of Caribbean countries. To that end, the paper analyzes estimates of the employment-output elasticity and the response of employment growth to major sources of labor market determinants, in the long and short run. The main determinants of employment include government investment and private sector credit, while the major determinants of external performance are real effective exchange rate, the price of major exporting commodities, the number of tourists, and growth in major trading partners. The paper concludes with a menu of policy recommendations and structural reforms towards sustaining high employment growth and higher living standards in the Caribbean.