Summary:
After reaching middle-income levels, most developing countries find it challenging to further economically converge to developed countries. This phenomenon is referred to as the “middle-income trap.” Economists have not reached a consensus on the sources of the middle-income trap, nor have they found an effective “prescription.” Long-term cross-country data demonstrate an obvious positive correlation between financial deepening and economic development. However, as financial deepening improves, this positive correlation peters out. Does this indicate that the role played by financial development in promoting economic development also varies？ If so, is it related to systemic differences in industrial structure and patterns of technological progress at different stages of development？ In this study we take a new structural economics perspective, and focus on the effects of financial development (including financial deepening and financial structures) on the upgrading of industrial structures and economic convergence in developing countries at different stages. First, we collect cross-country panel data (1960-2014) on financial and economic development to empirically test the non-linear growth effect of financial deepening at various stages. Second, we construct an endogenous growth model combined with industrial and financial structures for developing countries and investigate the interactions and underlying mechanisms among financial development, industrial upgrading, and economic convergence. The analyses show that there is a “minimum requirement” on the degree of financial deepening for a country that is specific to the country's development stage, and below which it will be difficult to move to the next stage of industrial upgrading. In addition, in terms of economic development, the requirements on the level of financial deepening for industrial upgrading are not static, but initially increase and then slowly decline. This implies that under financial constraints, due to relatively limited capital accumulation, middle-income countries must firstly further improve their levels of financial deepening to effectively support innovative industries. They may otherwise fall into the “imitation trap,” get stuck at the middle-income level, and fail to converge to developed countries. In the processes of financial deepening, industrial structure upgrading, and convergence, developing countries' endogenous optimal financial structures will also undergo dynamic adjustments, i.e., shifting from bank-based indirect financing to market-based direct financing. In the early stages, their property right protection systems and financial supervision systems are incomplete. Banks have an advantage over the financial market in providing credit supervision services, which can to some extent reduce information asymmetry and thus the moral hazard problem and encourage the effective conversion of household savings and idle funds into long-term investments. This in turn promotes financial deepening and facilitates industrial structure upgrading and convergence, which will lead to further improvements in property right protection and in the financial supervision system. However, if a bank's indirect financing is still the main financing channel when the levels of project financing and project risk increase, this will lead to higher supervision costs, thus limit the financing scale and returns of the project. Therefore, in the process of economic development, a country should gradually strengthen its construction and standardization of its financial market, and shift its financial structure to a more balanced or a market-based financial system. This study makes three main contributions. First, we reveal the effect of industrial structure upgrading on financial deepening and how this effect changes with the development stage. Second, based on the perspective of new structural economics, we provide an endogenous growth framework augmented with financial system for analyzing the underlying mechanism and conditions of the middle-income trap. Third, this study demonstrates how a country's optimal financial structure dynamically adjusts in the processes of financial deepening, industrial structure upgrading, and convergence. Thus, from the perspective of new structure economics, we provide a theoretical framework for analyzing the dynamic changes in the relationship between financial and economic development and reveal that overcoming the middle-income trap is a transformation process combining industrial upgrading, financial development, and institutional improvement.
毛盛志, 张一林. 金融发展、产业升级与跨越中等收入陷阱——基于新结构经济学的视角[J]. 金融研究, 2020, 486(12): 1-19.
MAO Shengzhi, ZHANG Yilin. Financial Development, Industrial Upgrading, and Escaping the Middle-Income Trap: The Perspective of New Structural Economics. Journal of Financial Research, 2020, 486(12): 1-19.
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