On Finance and Growth
From the early Eighties the change and amelioration were extended to the main functions and activities of the Italian financial industry.
There was improvement in the handling of payments and financial transactions. Better procedures, new technology, more effective risk control promoted less use of cash and deposits, lower costs in exchanges, extensive recourse to gross settlement and delivery-versus-payment.
There was improvement in the range of intermediaries (such as investment funds) and of financial forms (securitization, as well as a moderate use of derivatives, mainly for hedging).
There was improvement in the operating efficiency (lower costs) and in the allocative capacity of banks and market agents. Both exploited economies of scale and scope, through mergers and a wider spectrum of activities (despecialisation). A better balance between the two main channels of finance, credit intermediaries and markets, emerged.
There was improvement in the informational efficiency of securities markets. The Stock Exchange, in particular, increased its capacity to provide ‘price’ information from the so called Working-Roberts-Fama weak form (prices fully reflect historical prices) to the semi-strong form (prices fully reflect all publicly available information, including historical prices) and, in some of its activities at least, to the strong form (prices fully reflect all private as well as public information).
There was improvement, finally, in the incentives and disincentives for curbing moral hazard, mainly through a large scale privatization of both banks and financial markets.
The positive effects on the Italian economy of the transformation which took place in the financial industry were not negligible. According to my estimates, it added 0.3 percentage points to the annual increase of per capita Gdp from 1985 to 1998. The performance of total factor productivity deteriorated in those years, but for non-financial, “real” reasons.
In conclusion, theory and evidence teach policymakers a mixed lesson. Better finance is conducive to higher growth. But, at least in normal conditions, improving finance is a daunting and slow process. For both reasons it is a task never to be undervalued and postponed. Its successful fulfilment postulates continuity.
