Financial Structure, Industrial Structure, and Economic Development: A New Structural Economics Perspective

Qiang Gong, Justin Lin () and Yilin Zhang

Manchester School, 2019, vol. 87, issue 2, 183-204

Abstract: We investigate the evolving relative importance of banks and equity markets during different stages of economic development. Unlike previous studies, we propose a demand‐side theory on the appropriate financial structure for an economy. We show that a bank‐based financial structure is more appropriate than a market‐based structure for developing countries, and that for developed countries, a market‐based financial structure is more appropriate than a bank‐based structure. This is due to the industrial structures of countries and the different advantages of banks and equity markets for serving the real economy. Our findings are consistent with recent empirical facts and provide new perspectives to understand the structural change of a country’s financial system.

Date: 2019
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