Financial Efficiency in Economic Growth - Explaining the Paradox of High Growth and Low Financial Efficiency in the Transitioning Chinese Economy - Library of Young and Middle-aged Economists

Author: Xin Nianjun
Publisher:
Publish Date: 2006-12-01
Features: Economic growth is a permanent theme in economic research. With the deepening of monetization and financialization, the relationship between financial development and economic growth has become increasingly close. It is generally believed that financial efficiency and economic development are coordinated. However, during China's financial development process, there has been a significant deviation between financial efficiency and economic development. On one hand, since the reform and opening-up in 1978, China's economy has achieved sustained high growth, widely recognized globally. On the other hand, scholars generally agree that China's financial efficiency is low. Therefore, the coexistence of high economic growth and financial "low" efficiency has become a paradox that needs to be explained theoretically. This book combines research methods such as integrating economic research and financial economics research, as well as normative analysis and empirical analysis, to focus on answering the following three questions: First, how and what is the essence of financial "low" efficiency under the context of high economic growth; second, how does China achieve high growth under the context of financial "low" efficiency; and third, the rationality, conflicts, and development trends of their coexistence. This book is set against the backdrop of China's economic transformation, drawing on mainstream economic growth theory, development finance theory, and the new theory of the relationship between finance and growth, while closely linking the specific and prominent conditions of China's economic and financial landscape. It focuses on explaining the mystery of China's high economic growth and financial "low" efficiency, and ultimately aims to explore ways to improve China's financial efficiency and achieve sustainable economic growth. This book mainly includes 6 chapters. Chapter 1, Introduction, first proposes the theoretical and practical significance of the research questions in this book and explains the relevant concepts. It then introduces the research approach and methods of the book, and finally highlights the main innovations and shortcomings of the book. Chapter 2 reviews domestic and international scholars' research on financial efficiency in economic growth. First, it reviews the relevant research of foreign scholars, which is reflected in theories of economic growth factor analysis, development finance theory, and the theory of the relationship between finance and growth. In the theory of economic growth factors, Pagano (1992) and others made many pioneering efforts to internalize financial factors into economic growth models. Development finance theory focuses on issues such as financial repression, financial deepening, and financial constraints. The theory of the relationship between finance and growth focuses on the correlation, causality, and mechanisms of the two. Second, it reviews the relevant research of domestic scholars, which follows two paths: one is direct research on China's financial efficiency, mainly focusing on financial allocation efficiency; the other is research on the relationship between finance and growth, focusing on China's financial deepening and economic growth. Finally, it evaluates the above research of domestic and international scholars, pointing out their contributions and shortcomings. We find that existing research has not provided a systematic and reasonable explanation for the coexistence of high economic growth and financial "low" efficiency. Chapter 3 proposes a new framework for economic growth analysis that includes financial efficiency factors. First, it briefly reviews and evaluates the recent popular economic growth models that include financial factors. The results show that although these models have distinguished between financial and non-financial factors, their research on financial issues has not analyzed them from both qualitative and quantitative (i.e., financial efficiency) perspectives, leading to a lack of explanatory power for the imbalance between economic growth and financial development, as well as between financial total expansion and financial efficiency improvement. Second, this chapter clearly proposes a new framework for economic growth analysis that includes financial efficiency. This framework not only includes financial and non-financial factors but also explicitly states that financial factors should be examined from both quantitative and efficiency perspectives. It further summarizes six financial, financial efficiency, and growth combination models and conditions in the history of economic and financial development. Third, this chapter will also analyze the application of the new framework to transition economies, proposing two simple models for transition economies: , a model where transition economies sacrifice the intrinsic efficiency of the financial sector and financial allocation efficiency to achieve macroeconomic growth. Financial and economic growth coordination requires strict necessary conditions, i.e., high efficiency of microeconomic entities. However, in transition economies, the low efficiency characteristics of microeconomic entities make it difficult to achieve coordinated development between finance and economic growth. To ensure the rigid growth target of transition economies, China chose to sacrifice the efficiency of the financial sector and the initial allocation efficiency of finance. Second, a model of financial leakage and the "reverse extraction, reverse conservation" growth effect with financial allocation efficiency correction. During the transition period, there is a significant amount of financial leakage in both production and non-production processes, and most of this leakage ultimately enters the production process through direct or indirect channels, exerting a corrective effect on the low efficiency of initial financial allocation. Chapter 4 discusses the financial mobilization efficiency and allocation efficiency in China's transition period economic growth. First, it analyzes the high efficiency of financial mobilization and financial transformation in China's high growth. During the transition period, various political and economic conditions required China to prioritize its rigid growth target as the primary macroeconomic goal. Therefore, providing strong financial support to enterprises in the early stages of the transition was crucial. When fiscal support became unsustainable, China implemented strong control over finance. Strong control finance has mobilization advantages, combined with factors such as a low monetization level, contributing to the high efficiency of financial mobilization and transformation, providing substantial financial support for growth. Second, strong control finance has led to low efficiency in the financial sector and initial allocation efficiency. Under strong control finance, the financial system has both commercial and policy objectives, with the latter being dominant in the early stages of the transition. Therefore, through the state-owned financial system, mobilized and concentrated financial resources were primarily allocated to state-owned enterprises with relatively low efficiency, leading to low efficiency in the financial sector and initial allocation efficiency, i.e., financial "low" efficiency in the Western sense. This type of financial "low" efficiency is a suboptimal choice that aligns with national strategy. Third, the widespread existence of financial transfer and "reverse conservation" in China's transition economy has objectively corrected the low efficiency of initial allocation to some extent. On one hand, financial transfer in the production process of China's transition economy is "direct reverse conservation." This is mainly manifested in: financial transfer during enterprise restructuring and subsequent efficiency improvements, external enterprises achieving better development by obtaining commercial credit and investment funds from enterprises, and external production enterprises developing and growing with direct financial support. On the other hand, most financial transfer in the non-production process of China's transition economy ultimately "indirect reverse conservation." Non-production financial transfer is mainly transferred overseas or transformed into financial hoarding. A portion of this hoarded financial transfer forms direct investment in the external economy, i.e., "directly unlocked"; another portion enters the private financial sector or returns to the financial sector, forming an important source of productive investment for other external investment entities, i.e., "indirectly unlocked." This, to some extent, has achieved a distorted form of secondary allocation efficiency characteristic of China's transition period. Chapter 5 discusses the growth effects of financial efficiency and non-financial factors in China's transition period. First, it analyzes the effect of financial allocation efficiency on economic growth. In China's transition period, financial allocation efficiency includes initial allocation efficiency and secondary allocation efficiency. The low efficiency of initial financial allocation has supported the stable growth of enterprise output, while secondary allocation efficiency has provided certain conditions for the growth of the external economy. China's financial efficiency, characterized by distinctive initial allocation low efficiency and a certain degree of secondary allocation efficiency, has jointly supported the high growth of China's economy. Second, it analyzes the growth effect of financial total expansion, which is consistent with the high efficiency of financial mobilization. We examine the comparison between China's financial total expansion and economic growth from aspects such as money supply, financial assets, total fixed asset investment, and related ratios, and the results show that China's financial total expansion is highly consistent with economic growth, reflecting the supporting effect of financial total expansion on economic growth. Third, it also analyzes the growth effect of non-financial factors. This mainly includes: changes in the macroeconomic environment brought about by institutional changes such as market-oriented reforms and opening-up, changes in microeconomic factors caused by labor transfer, technological progress, and introduction of foreign investment, and changes in meso-factors brought about by changes in the economic structure. All of these have played a major role in promoting China's economic growth. Chapter 6 summarizes the issues of economic growth and financial efficiency in China's transition period and proposes suggestions for improving financial efficiency. First, it summarizes the issues of financial efficiency and economic growth in the pre-transition period of China. In the pre-transition period, China chose the model of strong state control over finance to support growth, which directly led to China's distinctive financial efficiency situation. Strong control finance has mobilization advantages, creating high savings mobilization and transformation efficiency, while also incurring low efficiency in the financial sector and initial allocation efficiency. However, "reverse extraction, reverse conservation" has to some extent corrected the initial allocation low efficiency. Second, it points out the reasonable boundary and unsustainable nature of strong financial control and the growth model in the pre-transition period. As the transition process deepens, the reasonable boundary of strong control finance has changed. There are more constraints on financial total expansion, the formation of a buyer's market and the end of the growth effect of "silly investment" have occurred, the contribution of the external economy has increased, the landscape of state-owned enterprises has changed significantly, the marketization pressure on banks and securities markets has increased, and the overall socio-economic development has entered a new stage. The original model of sacrificing financial efficiency for economic growth and the model of sacrificing social fairness through "reverse extraction, reverse conservation" to achieve growth and allocation efficiency correction have become unsustainable. Finally, it proposes the goals, principles, and measures for improving China's financial efficiency in the post-transition period. It argues that ensuring the unity of sustained high economic growth and high financial efficiency should be the overall goal of improving China's financial efficiency in the post-transition period. To achieve this goal, it is necessary to follow the principle of gradually relaxing state control over finance and reforming and developing finance according to the inherent requirements of a market economy. Specific measures include: actively and steadily advancing the property rights reform of state-owned enterprises in competitive sectors; actively promoting the commercialization reform of state-owned banks; quickly resolving historical issues such as equity segmentation in the securities market, and actively promoting the standardization and internationalization of the securities market; actively supporting the development of private finance and venture capital markets; fully utilizing the opening-up of the financial industry to promote the improvement of domestic financial efficiency; improving the fiscal and tax system; strengthening credit construction and regulating government behavior, etc.