The role of finance in economic growth is assessed here as part of a comparison between two European peripheries – Scandinavia and southern Europe- in the second half of the nineteenth century. It reveals that financial development was much greater in the former region, a fact explained because Scandinavian financial institutions were better not only at mobilizing the funds of the public but also at transforming them into credits available to the non-financial private sectors of the economy. Different per capita income levels, through savings, influenced this outcome but exogenous factors arising out politics, society and culture appear to have been more important still in this process.
Financial Systems in the Periphery:
A Nineteenth Century Comparison of Scandinavia and Southern Europe
Instituto de Ciências Sociais
Rua Miguel Lupi, 18 r/c
One of the strongest ideas in circulation concerning economic growth attributes an important role to financial intermediation in determining long run macro economic performance. Recent comparative studies have shown that the rise in real GDP per capita since 1960 is strongly associated with the size, structure and scope of the respective financial systems (King and Levine, 1993; Levine, 1997). The reasons for this have been clear for some time. Financial institutions provide money in response to the mounting demand for real cash balances and consequently help reduce the cost of transactions. They supply improved entrepreneurship for firms, which enables the latter to use financial resources better and thus to contribute to increases in TFP. By gathering information on clients, projects and technologies more cheaply, through economies of scale, they become able to reduce risks, attract more savings and combine the latter into loans of a scale that would be beyond the reach of non-institutional actors. Their capacity to monitor borrowers over time permits investment in projects with a higher average return (and risk). All of this implies a larger amount of finance available at a relatively lower price and a better allocation of resources. Historical studies in this vein, although part of a long tradition, are not frequent and have often been based on single countries. When comparative, they have focused prevalently on the regulatory and institutional aspects of the problem, asking what was the impact of this on the efficiency with which banking systems allocated resources among competing ends. The basic element in these enquiries is the classic dichotomy between two contrasting arrangements: the universal, bank-oriented, Continental system, and the Anglo-Saxon, functionally specialised, market oriented system (Ziegler, 1998). Although fundamentally concerned with the influence this had on growth, only a few of these studies have actually tested this relationship quantitatively, and the debate over the respective allocative merits of these systems continues to rage, still, it seems, inconclusively (Kennedy,1987; Calomiris, 1995; Collins, 1998; Fohlin, 1999). Some studies, however, have directed their attention to a more rigorous verification of the generally assumed relationship between finance and economic growth. These exercises have shown that from the mid 19th century long run structural relationships did exist between the two variables. They have also brought to light, in some cases, the exogeneity of the financial variable and the fact that finance Granger-caused growth (Hansson and Jonung, 1997; Wachtel and Rousseau, 1995 and 1998; Rousseau and Sylla, 2001). Any such research obviously requires a considerable amount of compilation of historical financial statistics. The bulk of the historical literature has paid relatively little attention, however, to quantifying the evolution of the scale and structure of national financial systems over the long run and making these results...