Chairman: Dr. Zhou

Ronald Mckinnon and Edward S.Shaw, two economics professors from Stanford University in the United States, published their own works based on previous studies in 1973. Mckinnon's book is Money and Capital in Economic Development, published by Brookings Institution. Xiao's book is Financial Deepening in Economic Development, published by Niulv University Press. In their book, they put forward the famous theory of "financial repression", blaming the economic underdevelopment of developing countries on financial repression. In their view, the premise of economic development is that finance cannot be constrained. Therefore, they advocate "deepening" finance or promoting financial liberalization in relevant countries. The publication of these two books marks that the theory of financial development has become a systematic theoretical branch from the previous scattered views.

In this paper, the financial development theory is divided into four stages in chronological order, and finally they are compared and briefly evaluated. This paper aims to introduce the formation and development of financial development, so that readers can have a preliminary understanding of it.

First, the ideas before 1973 can be attributed to the source of financial development theory.

The theory of financial development was founded by McKinnon and Xiao in 1973. Influenced by liberalism, McKinnon and Xiao both put forward the radical proposition that developing countries should take the road of financial liberalization in their respective works. In this sense, the liberalism thought expressed by British philosophers John Locke, Adam Smith and Jeremy Bentham in their respective works can be described as the origin of McKinnon-Shaw theory.

Another source of financial development theory is the thought or viewpoint about the importance of finance to economic development, because the essence of financial development theory is to emphasize the importance of financial factors in the process of economic development. This idea can be traced back at least to joseph schumpete, an Austrian-American economist. Schumpeter emphasized the importance of finance in economic development in his famous book Theory of Economic Development (published in 19 12). He further pointed out that finance and development have the following relations: "In this sense, the provision of credit is like an order to adapt the economic system to the purpose of entrepreneurs, and it is also like an order to provide goods to meet the needs of entrepreneurs; This means entrusting productivity to him. Only in this way can economic development emerge from a simple cycle of complete balance. " (pl07, Chinese translation page 1 19)

In 1950s and 1960s, the pioneering research of John Gail, Edward Shaw, Alexander Gerschenkron, Hugh Patrick, Rondo Cameron, John Hicks and Raymond Goldsmith laid the foundation for the establishment of McKinnon-Shaw theory. The following article focuses on the views of Gerry and Shaw, Patrick and Goldsmith.

1: the views of Gerry and Shaw.

In the 1950s, John G. Gelli and Edward S. Shaw, professors of economics at Stanford University in the United States, made pioneering research in two papers, namely, the article entitled "Financial Aspects of Economic Development" published in the September issue of American Economic Review (1955) and the article published in. In these two papers, they expounded the relationship between finance and economy and the important role of various financial intermediaries in the process of saving-investment.

The loan towel in financial theory published by Brookings Institution 65438-0960 is a summary and development of Gerry and Shaw's previous views. In this book, they think that money is not the only analysis object of monetary and financial theory, and monetary and financial theory should accommodate diversified financial assets, and money is just one of countless financial assets. They also believe that in addition to the monetary system (including commercial banks and central banks), various non-monetary financial intermediaries also play an important role in the process of saving-investment. They divide the whole economy into surplus units (or departments), surplus units (or departments) and deficit units (or departments) according to the income and expenditure of economic units (or departments) in the income-output account. In the whole saving-investment process, the surplus unit is the saver and the deficit unit is the investment test. This "professional division of labor" of economic units (or departments) in the process of saving-investment is the basis for the existence of debt, financial assets and financial intermediaries. The function of finance is to transform savers' savings into investors' investments, thus improving the productive investment level of the whole society.

Another outstanding contribution of Gurley and Shaw is to distinguish between "internal currency" and "external currency". The currency issued when the government purchases goods and services or makes transfer payments is called "external currency", and the currency issued when the government purchases private securities is called "internal currency". This distinction is necessary to introduce McKinley's and Shaw's financial development theories.

2. Patrick's point of view.

Hugh T patrick, an economist at Yale University in the United States, pointed out in his article "Financial Development and Economic Growth in Underdeveloped Countries" (published in Economic Development and Cultural Change, June No.5438+0966+0) that there are two research methods for the relationship between financial development and economic growth: one is the "demand-following" method, which emphasizes the demand side of financial services. In other words, the demand of economic entities for financial services has led to the emergence of financial institutions, financial assets and liabilities and related financial services. The other is the "supply leading" method, which emphasizes the supply side of financial services, and the supply of financial institutions, financial assets and liabilities and related financial services precedes the demand. In view of the relative neglect of the latter method in theoretical circles, Patrick thinks that the two methods should be combined. He also pointed out that in practice, demand-following and supply-leading phenomena are often intertwined, but it is undeniable that there is an optimal order problem between demand-following finance and supply-leading finance, that is, in the early stage of economic development, supply-leading finance dominated, and with economic development, demand-following finance gradually dominated. Moreover, the problem of optimal order may also exist within and between departments.

Next, Patrick focused on the relationship between financial farting and economic growth. His starting point or reference is the relationship between financial assets and debt stock and actual capital stock, because he presupposes that there is a strong positive correlation between capital stock and actual output. Patrick pointed out that the influence of the financial system on the capital stock is reflected in three aspects: first, it improves the allocation efficiency of a given amount of tangible wealth or capital, because financial intermediaries promote changes in its ownership and composition; Second, the allocation efficiency of new capital has been improved; Third, it has accelerated the speed of capital accumulation.

3. Goldsmith's point of view.

1969, Raymond W. Goldsmith, an economist at Yale University in the United States, published his well-documented book "Financial Structure and Financial Development" (Goldsmith, Chinese version, 1994), put forward the concepts of financial structure and financial development, discussed the financial structure models at different stages of economic development, made an empirical study on financial structure and financial development, and created financial structure and financial development. Goldsmith believes that the sum of a country's existing financial instruments and financial institutions constitutes the country's financial structure, including the relative scale of financial intermediaries, operating characteristics, operating methods, the concentration of various branches and so on. According to the main numerical indicators, he classified the financial structures of all countries in the world into three types in a highly generalized way, and compared the different types of financial structures vertically in history and horizontally in the world by combining qualitative and quantitative methods, and obtained the different characteristics of various financial structures.

On the basis of establishing the theory of financial structure, Goldsmith made a pioneering and in-depth study of financial development, and thought that financial development is the change of financial structure. To study financial development, we must find out the way of financial development based on the information of short-term or long-term financial structure changes. More importantly, Goldsmith creatively put forward stock and flow indicators to measure a country's financial structure and financial development level. Most importantly, the financial correlation ratio establishes the important factors that determine the financial correlation ratio: monetization ratio, non-financial correlation ratio, capital formation ratio, capital output ratio, external financing ratio, financial issuance ratio, financial asset price fluctuation ratio and new issuance multiplier, and their practical calculation methods. The changes of financial correlation ratio in recent hundred years are discussed.

Second: the formal formation stage of financial development theory. That is, from 65438 to 0973, McKinnon and Xiao's respective works came out one after another, marking the formal formation of financial development theory. This division includes some financial repression models with strict logic and normative argumentation, which were put forward by Bassanio Kapoor, Vicente, Garbis, Maxwell J Fry, Young Parr Lee, Donald Ma Xisen and Ewan Ger Qiu in the late 1980s based on the analysis framework of McKinnon and Shaw. In other words, it extends the McKinnon-Shaw theory. But here we mainly introduce the views of McKinnon and Shaw.

Influenced by the development economics after World War II, McKinnon (1973) and Xiao (1973) gave up their research methods on the financial system of mature market economy countries and turned to the financial problems of developing countries. Mckinnon and Xiao found that there is obvious financial repression in developing countries. The government usually exercises strict control over interest rates. Under the control of interest rate, inflation prevailing in developing countries often makes the real interest rate negative. On the one hand, negative real interest rate harms the interests of savers, weakens the ability of financial system to gather financial resources, and makes the development of financial system stagnate or even retrogress; On the other hand, it provides subsidies to borrowers to stimulate the latter's demand for financial resources, resulting in a situation in which the supply of financial resources is less than the demand. Credit rationing is needed at this time. However, countries often allocate financial resources according to their own preferences, which damages the function of financial system in allocating resources.

In fact, in most economies that suppress finance, the deposit and loan interest rates are capped. Moreover, in developing countries, there is almost no competitive banking system. Although private commercial banks can avoid the upper limit of loan interest rate through compensatory balance, some state-owned banks and most public departments seem to abide by loans. Under the condition that banks truly abide by the upper limit of loan interest rate, the phenomenon of non-price rationing in loanable funds will inevitably occur. Credit is not allocated according to the expected productivity of investment projects, but according to transaction costs and perceived default risks. The quality of collateral, political pressure, "reputation", loan scale and the benefits secretly accepted by loan handlers will also affect the distribution of credit.

Even if the allocation of credit is random, the average efficiency of investment will decrease with the reduction of the upper limit of loan interest rate, because the investment projects with lower yield can now be profitable. Entrepreneurs who have not applied for bank loans are now entering the market. In this way, when the interest rate is set too low, adverse selection will occur in social welfare.

Mckinnon emphasized the difference in return on investment in an economy where finance is suppressed: "Facing the huge difference in return, it is a serious mistake to regard development as the accumulation of homogeneous capital with a single productivity ... Let us define' economic development' as the narrowing of the huge difference in social return between existing investment and new investment under the control of domestic entrepreneurs".

The interest rate ceiling distorts the economy in four ways. First of all, low interest rates make income earners tend to spend more now and less in the future, thus making savings lower than the social optimal level. Second, potential lenders engage in low-yield direct investment, instead of putting money in the bank and lending it out. Third, bank borrowers who can get funds at low loan interest rates will choose capital-intensive projects. Fourth, entrepreneurs with low-income projects are potential borrowers. These entrepreneurs are reluctant to borrow at higher market clearing rates, because it will make them lose more than they gain. When the screening process of banks is random, the return rate of some capital investment projects will be lower than the lower limit set by the market clearing rate, which makes the average return rate of funds in the whole society low.

For those economies whose finance is restrained, McKinnon and Xiao Di's policy suggestions suggest that developing countries cancel the above-mentioned financial restraint policies, and make interest rates reflect the market demand level for funds by relaxing interest rate control and controlling inflation, so as to make the real interest rate positive, restore the ability of financial systems to gather financial resources, and achieve the purpose of financial deepening.

When talking about how financial development can promote economic growth, McKinnon gave up the assumption that money and real capital are competitive substitutes in traditional monetary finance theory. Mckinnon believes that the backward financial system in developing countries makes investment rely on internal financing instead of external financing. Because the financial market is underdeveloped, potential investors can't take non-monetary financial assets as the object of saving and preserving value. If the actual deposit interest rate is positive, potential investors will use money as a means of maintaining value, and money becomes the premise or channel of investment at this time. If the real rate of return of money-real interest rate increases, the opportunities for capital formation of endogenous financing will also expand, which is the so-called "channel effect". On the other hand, the expansion of endogenous financing capital formation opportunities increases the large cash balance held by producers, improves the credibility of investors and increases the possibility of investors obtaining external financing. Therefore, the channel effect improves the level of savings, promotes the formation of capital, and then promotes economic growth. Xiao (1973) put forward the "debt intermediary theory", which holds that money is the debt of the financial system, not the real social wealth. Money plays various media roles in the whole society. It can improve production efficiency, increase output and promote savings and investment by reducing production and transaction costs.

The innovations and shortcomings of McKinley's and Shaw's theories are also reflected in:

1: the place of novels. Mckinnon-Shaw theory is the application of general equilibrium theory in financial theory and the representative of economic liberalism in financial theory. Before the formation of McKinnon-Shaw theory, the dominant view was that the financial sector was different from other economic sectors, and the effective operation of the financial sector could not be separated from government intervention. Mckinnon-Shaw theory questions this and advocates reducing government intervention in finance as much as possible. This is a major feature of McKinnon-Shaw theory.

Theoretically, McKinnon and Shaw criticized and abandoned neoclassicism theory and Kessler theory. That is, in the process of economic development and structural transformation, inflation is inevitable and even beneficial to development. They advocate financial liberalization (resulting in higher interest rates). In the case of high interest rate, although there is a large demand for money, a large amount of investment and high quality of investment, the financial liberalization policy can not only avoid inflation, but also cause economic recession. This is not only different from the Keynesian view (advocating low interest rate policy to stimulate investment), but also different from the monetarist view (advocating controlling currency issuance as an effective means to stabilize the economy). This uniqueness of McKinnon-Shaw theory has aroused widespread concern in theoretical and practical circles. In addition, McKinnon's in-depth investigation and incisive analysis of the relationship between finance, finance and foreign trade will help people understand the deep-seated causes of economic distortion, and at the same time make McKinnon-Shaw theory rise from a point of view to a more complete system. Therefore, the contribution of McKinnon-Shaw theory to development economics cannot be underestimated.

2. Defects of McKinnon-Shaw theory. Their financial deepening theory only pays attention to the role of money in gathering financial resources, ignoring the effective allocation of resources by the financial system through information production, as well as other functions such as managing risks and implementing corporate control. Therefore, in the theoretical framework of McKinnon and Shaw, the financial sector does not create wealth, and the economy is still divided into the entity sector and the financial sector. More importantly, in the classical Solow growth model, the key to determine the long-term economic growth rate lies in total factor productivity, and capital formation mainly affects the level of economic growth, but has no effect on the long-term economic growth rate. In the theory of financial deepening, financial development can only affect capital formation, but not total factor productivity, which greatly weakens the value of financial development theory. Although after McKinnon and Shaw, many economic and financial economists devoted themselves to developing and perfecting the theory of financial development, their research was limited to measuring and testing the theories of McKinnon and Shaw, and they still did not answer the question of how financial development affected the total factor productivity. Therefore, the theory of financial development has not been substantially developed, and its position in economics has gradually declined. Robert Rock (1988) asserted that economists overemphasized the role of finance in economic growth. On the other hand, development economists are skeptical about the role of the financial system in financial development (AnandChandavarkar, 1992).

Third, the latest development of financial development theory in the 1990s.

In 1990s, some economists combined endogenous growth and endogenous financial intermediaries (or financial markets) into the model on the basis of absorbing the important achievements of endogenous growth theory, and the complexity of the model increased accordingly. We call this newly developed theory of financial development the theory of financial development in 1990s, and the economists who contributed to it are called the theorists of inclusive development in 1990s. The important difference between financial development theorists in the 1940s and McKinnon-Shaw School is that in the 1990s, financial development theorists directly modeled financial intermediaries and financial markets, while McKinnon-Shaw School either regarded financial intermediaries and financial markets as given or simply dealt with them.

According to the previous introduction, we know that the theory of financial development was formed in 1973, and then experienced the initial development (1970s and 1980s). The endogenous growth theory (also known as the new growth theory) that appeared in the 1980s is finance.

The development theory provides a space for further development of financial theory and economic development theory, and injects new vitality. By the 1990s, some financial development theorists were no longer satisfied with tinkering with McKinnon-Shaw's theory. They are obviously aware of many defects of the financial repression model (such as the lack of utility function, the limitation of the form of total production function and strict assumptions, etc.). ) and radical policy suggestions based on these models (for example, financial liberalization may not be realistic for developing economies or transition economies). In view of this, they further developed the theory of financial development on the basis of absorbing the latest achievements of endogenous growth theory. Different from the last development, this development broke through the McKinnon-Shaw framework and incorporated endogenous growth and endogenous financial intermediaries (or financial markets) into the financial development model, although this made the model more complicated and used more mathematical tools. One common feature of these models is to directly model financial intermediaries and financial markets, with the purpose of explaining how financial intermediaries and financial markets are formed endogenously and the relationship between financial development and economic growth, and on this basis, some policy suggestions different from McKinnon-Shaw School are put forward.

Endogenous growth theory rose in 1980s, and the successive publication of two classic papers by Paul Romer (1986) and robert lucas (1988) marked the formation of endogenous growth theory. The basic viewpoints of endogenous growth theorists are: economic growth is the result of endogenous factors in the economic system, not the result of external forces; In other words, endogenous technological change is the decisive factor of economic growth. According to different assumptions, endogenous growth models can be divided into: endogenous growth model under the condition of complete competition and endogenous growth model under the condition of monopoly competition. The endogenous growth model under perfect competition appeared in the middle and late 1980s, and the endogenous growth model under monopoly competition appeared in the 1990s. Limited by space, I won't introduce these two paragraphs in detail here.

The financial theory in 1990s paid more attention to and integrated the relationship between financial development and economic growth, which can be roughly divided into the following five parts: firstly, the relationship between financial intermediation and economic growth was studied; Second, study the relationship between stock market and economic growth; Second, combine banks and stock markets to study their relationship with economic growth; Fourth, go deep into the industry level and study the relationship between financial development and industry growth; Fifth, go deep into the manufacturer (enterprise) level and study the relationship between financial development (especially the development of stock market) and enterprise capital structure. Their conclusion is of great significance. In many developing countries with emerging stock markets, banks are worried that the development of the stock market will be unfavorable to them-reducing their turnover, but their results show that this is not the case. For the developing stock market, the initial improvement of its operating conditions will increase the leverage ratio of enterprises (which is largely attributed to the fact that the development of the stock market will bring more opportunities for enterprises to share risks and collect information), thus increasing the turnover of banks. Their research results also show that in countries with developing financial systems, stock markets and banks have different but complementary functions. On this basis, they think that the policies aimed at developing the stock market may not harm the current banking system.

1.The uniqueness and usefulness of financial development theory in 1990s

The theory of financial development in 1990s was established on the basis of the theory of financial development and the theory of internal cattle growth in 1970s and 1980s. It is not only the fusion of the two theories, but also the simple fusion of the two theories. It has both theoretical innovation and new policy ideas. It tries to use the research method of endogenous growth theory to study how the financial system (including financial intermediaries and financial markets) is endogenous and how the endogenous financial system interacts with economic growth.

In 1990s, financial development theorists introduced some incompatible factors into their theoretical models, such as uncertainty, information asymmetry, imperfect competition, quality grade and externality. Because the model hypothesis is close to reality, the proposed policy proposition is more in line with the reality of various countries. Although the research object of financial development theory in 1990s is not limited to developing countries, and scholars who have made important contributions to the formation and development of this theory are basically limited to developed countries, it seems to have more reference significance and reference value for financial theory research and financial development practice in developing countries.

2.90 years of financial development theory defects and development prospects

Looking at the theoretical literature of financial development in the 1990s, it is not difficult to find that the theorists of financial development in the 1990s seem to overemphasize the advantages of the financial system. For example, their views are basically focused on the importance of financial system development (or financial development); But they don't know enough about the disadvantages of the financial system, especially the harm caused by improper financial development. For example, they lack research on financial turmoil and financial crisis. They have neither studied the root causes of financial turmoil and financial crisis, nor studied the mechanism of financial development transforming into financial turmoil and financial crisis. 1997 The financial crisis in Southeast Asia and its ripple effect on other countries may turn the interest of financial development theorists in the 1990s to this point.

In addition, since the theory of financial development rose in the 1990s, the theory itself is still in the process of continuous improvement, and its development prospect is quite broad, which also means that there are many problems to be further explored.

Fourth: conclusion.

We review the application of financial development theory in China through study and introduction. Undeniably, the value of financial development theory in China is limited. China's national conditions are special, for example, China is in the primary stage of socialism and the economic system is changing, which determines that we cannot blindly apply the theory of financial development. We should not only see the universality but also the particularity of financial development practice in various countries.

It should be pointed out that the theory of financial development has always focused on the study of financial development from the macro level, that is, the relationship between financial development and economic growth (especially in the 1990s), while the research on financial development from the micro level is slightly lacking. This may be because the financial development theory has not been formed for a long time, and the theoretical system itself is still being improved. Obviously, this provides a broad space for future research.

Because of the time, some theories involved in this paper, especially the relationship between financial development and economic development, are not introduced in detail. There must be immature views in this paper, so please give me detailed guidance.

References: 1. Tan Yong, Theory of Financial Development and Financial Development in China, China Economic Publishing House, 2000+0.

2. Liu Ren Wu Zhu, Theoretical and Empirical Research on Regional Financial Structure and Financial Development, Economic Management Press, 2003.

3. Jin Xuequn, Literature Review of Financial Development Theory, China Journal Full-text Database.

4. Zhu Yong and Wu Yifeng, "Technological Progress and Endogenous Economic Growth-A Review of the Development of New Growth Theory", China Social Sciences,No. 1999.

5. Liu Wei, "Western financial deepening theory and its main theoretical factions", "Economics"

China "1997 sixth issue.

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