Half a century ago nobody could even imagine the pace of growing that China is experiencing right now. Back then it was simply a country with a devastated by war economy that was just starting to recover from the most difficult periods in its history. Even a quarter of the century before when if was in the sunset of Mao period the future outcomes and opportunities for this country were not the best ones, they really looked unpromising. As of the beginning of this century China has the greatest pace of development among other countries of the world. Fifty years ago, no one could even closely estimate how China would grow. This fact sort of pushes back from any certain assumptions about the future China’s development. Anyways, for the past decade China has become one of the world’s leaders in production and economic growth. Since it has a great potential a great number of investors chose China to invest their money in. As the result for the past couple of years China started to experiencing overinvestment that is pretty dangerous and can easily cause a great place for investment to simply burst like a bubble. However, the country continues to show decent results in economic growth. Read More

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The year 2008 seems to be markedly different from all the other years. Apart from all the fun, frolic and celebrations, 2008 has witnessed a considerable economic decline at the start. Towards the ending of 2007, the instabilities in the world economy had started to creep in primarily because of a downward slump in the US economy and it attained a considerable proportion in January 2008 with a major crash shattering the stock markets all over the world. . The crash also dented the Bombay Stock Exchange in India. The economic decline that is witnessed during the initial months of 2008 is exactly not desirable in India which is considered to be one of the fastest emerging economies in the world along with China. The worst part is that, according to the predictions stated by the economic experts, 2008 is expected to reel under the weight of instabilities and low phases in the economy. This condition is expected to improve only after the first quarter next year. Read More

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There is much evidence to support the argument that trade is an ‘engine of economic development’. However, one can easily miss the negative externalities that occur from trade. The objective for this paper is to find out the extent to which international trade is an ‘engine of economic development’. The paper will aim to define the pros and cons of managing trade. Indicators such as employment and gross domestic product will be used. This is to help observe growth. Growth contributes to the increase in GDP. When industries are doing better, more jobs are created. This is because when foreign capital is invested, more employment opportunities are created. This could be further investigated by analysing data relevant to education, such as literacy rates. Conclusions can also be made from per capita levels and poverty rates. Finding out how much of the population is below the poverty line will help indicate how well the country is doing, and the overall satisfaction of the population. All these tools are useful for investigating growth. Growth leads to economic development in the long-run. With economic development, a country attains higher standards of living. Industries are more sophisticated and the nation is in a more stable position than before.

Countries who are looking for a competitive economy constantly looking for ways to improve your current situation. the goods that are cheaper than elsewhere in the country dear. This would mean that each country receives the product looks like in less developed countries be able to import. The importing country is a great demand for superior, simply because it does not comply with the production of sufficient funds. This may be the least developed countries rich in high demand for the product locally and abroad. Telecommunications is cheaper to buy in India compared to North America. Employees are willing to pay less in India. India has a comparative advantage in telecommunications. This is an example where the trade can be beneficial to the exporting country. Jobs, foreign venture capital, which would in turn contribute to GDP growth. This would also increase from the level of per capita income per capita.

There are situations where trading conditions can face scrutiny. Since jobs are being shipped for cheaper wages, workers in developed nations find themselves in a competitive environment. There is not only a devaluation in labour, but also a lack of jobs available. Companies are able to find cheap labour elsewhere, which urged them to move. Jobs are outsourced to another country. Pakistan is known for producing soccer balls through major sporting companies like Nike. The company finds cheap labour to gain substantial profits. Compared to the standards in North America, the labourers in Pakistan have poor working conditions and very low pay. As this may be a humanitarian issue in a developed nation, Pakistan welcomes the new labour opportunities. There is not enough job exposure in less developed nations, which directly contributes towards poverty. The low class workers are given a new way of life and more opportunities to work. In the rural regions of Pakistan, not only are there high unemployment rates, there is also a lack of capital. This creates opportunity for corporations to place factories and employ labour. The comparative advantage lies in labour, since an abundance is available. Companies have more flexibility when employing labour.

Capital is usually over in less-developed countries abroad. This could be done on plants and / or machinery parts. There are many possible outcomes of that. States to introduce new technologies and alternative production. Less developed countries are generally not exposed to such a capital intensive environment. Less developed countries are adopting a new industrial techniques. New forms of capital are welcome to the peoples of developing countries. Domestic work is dependent on the output. In less developed countries want to draw foreign investment to stimulate economic growth. If any of these companies to avoid losing both jobs and capital exposure. Economic growth is slowing down. If growth slows down, it seems unlikely, and economic development.

Countries such as India and China have a great system for exportation. Manufactured goods are produced at a much lesser cost and sold to the rest of the world at a competitive price. Companies like Wal-Mart are able to have goods made in China, then shipped to the United States. This system has brought an immense accumulation of GDP growth for both countries, and has lowered unemployment rates. China’s unemployment rate has seen an obvious decrease over the years. Accoring to statistics from Index Mundi, in 2004 the unemployment rate was above 10%. The latest data for 2009 shows a rate of 4%. India has seen a more gradual pattern in the decline for unemployment. In 2004 the rate stood at 9%, and by 2009 it declined to 7%. This decline in unemployment is a part of growth that is occurring consistently. More jobs are available. This is a good indication that companies are doing better. When companies are doing better, related industries are flourishing. As the industry progresses, national growth accumulates. This leads to further economic development.

China’s Nominal GDP increases in value as time progresses. Statistics from IIASA show that in terms of real GDP growth, there has been much volatility before the year 2000. When China decided to be more involved in trade, there was major improvement in growth. Trade plays a heavy role because of jobs being created in specific industries. These jobs are allocated towards the goods and services that bring GDP growth. China’s involvement in trade has a positive impact on GDP. After the millennium, we notice a major increase in both imports and exports. China sets an example in creating growth through trade. There is correlation between the country’s heavy engagement towards trading and the frequent rise in GDP. This correlation can be noticed from the increase in transit between imports and exports after the year 2000. This growth has been directly contributing towards development. The long-run initiative of development has helped raise standards for the nation.

China has seen tremendous improvement in GDP. With that, the country has also seen large reductions in population under the poverty line. The population under the poverty line was 30% in 1978, now the statistic has been reduced to 8%. As time progressed, much higher proportion of the population has been able to afford a decent living. Many new jobs have been created through trade, this led to better opportunities for citizens . As more manufacturing plants open, we find greater employment options. This consistent growth helps the country’s expansion in to further development.

There are cases when trade has not been successful in establishing this development. Many countries in the African continent are an example of this. Many of the lesser developed countries have high poverty levels combined with a corrupt democratic system. This causes a lack of confidence in investors, growth is slowed down. Thus economic development is held back. Less developed countries do not achieve their long term goals.

Pakistan’s agriculture and food industry is a poor starting position. Worrying is a cross-border food safety, animal or plant life or health, to expand. This has caused a bad trade if other countries do not want to import poor quality. The transaction requires sensitivity to the interests of other nations. Otherwise, countries that do not participate in trade due to a lack of confidence. Political corruption, which exists in Pakistan, the government will go the way of sound, ethical trading options. This proves a very valuable point. Trade alone can not act as an engine for all countries. Other factors should be controlled as well. If Pakistan, it required that the country has improved the standards of its total exports. To increase awareness of ethical trade and politics. This will help the brand better image of Pakistan. These initiatives will produce better results Trade. Investors to invest capital, create new jobs. Since opening more jobs in GDP. This shows that the growth of the economy. Economic growth consistently contribute to economic development.

Sub-Saharan region of Africa is known to export minerals. As trade increases, there is discouraged investment due to market imperfections. The market is highly volatile. The lack of investment leads to a decline in output growth. There are also concerns if the region is capable of creating long-term growth. Without growth, development won’t occur. This will keep the region in the same or worse position in the long-run. The Sub-Saharan trade also has concerns for a lack of transparency and poor policy-making. This causes efficiency to decline, since trading decisions take too long to implement. Experts have mentioned there should be a pro-active approach for transparency in the system. Meaning, regulators are not hiding information. Investors will gain confidence, which will further development in foreign capital. When there is more capital, more factories and machinery will be available. These assets require maintenance through skilled workers. When more labour is required, demand for jobs is higher. More workers are trained. This causes growth in GDP, which leads to growth in the economy. With growth, the country can envision economical development. This will lead to better stability at the macro-economic level.

There isn’t any indication that trade, on its own, can be an engine to drive economic development. There are many other factors that need to be considered along with trade. Pakistan needs a better system for food and health inspection. The Sub-Saharan African region requires further stability through creating better policies and promoting transparency. Every country has unique flaws. These flaws need to be fixed in a way that can benefit trade. Once these flaws are fixed, patience and consistency is required for better results. Through consistent growth, development is possible.

China has proven itself to be successful in economic development, which was achieved through growth. This growth was channelled through trade. Along with these benefits came negative externalities. Problems that are costly to the community. The factories built by overseas companies help make China one of the most polluted countries in the world. 16 out of the 20 most polluted cities in the world are found in China. The negative effects on the quality of water, air and land leads to an unhealthy atmosphere for most Chinese people. Thus driving down the average life expectancy for the community. These consequences require a cost-benefit analysis. Comparing negative externalities of pollution to the benefits from trade. Trade has also removed many jobs from certain countries. Many blue collared workers have seen their jobs shipped overseas. A country like Pakistan is not going to find similar results from trade like China did. Research will be needed to find other routes towards economic development. There is no reason to find trade to be the sole cause for economic development. The extent to which this is true is clear when studying the negative impacts. Policies need to be developed to uniquely suit the needs for each country, while maintaining a balance from other sources of economic growth.

Written by Basim Mirza

 

Sources Used

 

Index Mundi, unemployment

[Available Online: http://www. indexmundi. com/china/unemployment_rate. html]

IIASA, Essential Data: China

[Available Online: http://www. iiasa. ac. at/Research/SRD/data/fig_gdp_1. htm]

National Bureau of Statistics (China), Poverty Statistics in China

[http://www. nscb. gov. ph/poverty/conference/papers/

4_poverty statistics in china. pdf]

 

Abdullahi, A. D. , Suradi, S. (2009). Macroeconomic Volatility, Trade and Financial Liberization in  Africa.  World Development, 37(10), 1623-1636.

 

Masakure, O. , Henson, S. , Cranfield, J. (2009). Standards and export performance in developing  countries: Evidence from Pakistan. Journal of Trade and Economic Development, 18(3),  396-397.

 

Asia News, China: “the factory of the world” is the most polluted country.

[Available Online: http://www. asianews. it/index. php?l=en&art=3568]

 


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 Proposal Writing for:

 

STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM UNDERDEVELOPED NATION (Nepal)

 

 

By

Jyoti Koirala (get2jyoti@gmail. com)

 

 

 

A Research Proposal Submitted to:

Faculty Members

Business or Economics Departmen

 

  

August, 2009

 

 

 

Chapter 1: Introduction

 

1. 1. General Background

 

Stock market development has an important role to play in economic development. Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a long-run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development.

 

Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth.

 

Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development.

 

Similarly Mishkin (2001) states that a well-developed financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services

 

From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market.

 

Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Varoudakis, 1996).

 

Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (Demirguc-Kunt and Levine (1996a).  Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth.

 

In underdeveloped like Nepal the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets can play a role in inducing economic growth in less developed country like Nepal by channeling investment where it needed from public.   Mobilization of such resources to various sectors certainly helps in economic development and growth. Stock market development has assumed a developmental role in global economics and finance because of their impact they have exerted in corporate finance and economic activity. The role of financial system is considered to be the key to economic growth (Neupane, et. al. 2006).

 

Paudel (2005) states that stock markets, due to their liquidity, enable firms to acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies.

 

Tuladhar (1996) states that financial markets are catalyst in the development of economy. The study further added that developed economies have highly sophisticated financial institutions. Over the past decade, many developing economies have established capital markets as they moved towards more liberal economic policies. These emerging markets have shown extraordinary growth with very high volatility, which have attracted many investors into these markets.

 

This study will attempt to dig out the empirical evidence in the context of underdeveloped nations regarding the role of stock market development on economic growth. 1. 2. Statement of the Problem:

 

In the last two decades, the link between financial intermediation and economic growth is a subject of high interest among academics, policy makers and economists around the world. There have been attempts to empirically assess the role of stock market and economic growth. The link between stock market and growth has varied in methods and results. There exists two controversies in the predictions.

 

Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle-income economies. In the same way, Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth Arestic et al. (2001) using time-series on five industrialized countries also indicate that stock markets play a role in growth. Various studies such as Spears, (1991); Levine and Zervos, (1998); Atje and Jovanovic, (1993); Comincioli, (1996); Levine and Zervos, (1998); Filer et al, (1999); Tuncer and Alovsat, (2001). Levine and Zervos (1995) and, Demirguc-Kunt (1994) has supported the view . stock markets promote economic growth. . With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau & Wachtel, 2000; Beck & Levine, 2003). Bahadur and Neupane (2006) concluded that stock markets fluctuations predicted the future growth of an economy and causality is found in real variables.

 

There are also alternate views about the role stock markets play in economic growth. Apart from the view that stock markets may be having no real effect on growth, there are theoretical constructs that show that stock market development may actually hurt economic growth. For instance, Stiglitz (1985, 1994), Shleifer and Vishny (1986), Bencivenga and Smith (1991) and Bhide (1993) note that stock markets can actually harm economic growth. They argue that due to their liquidity, stock markets may hurt growth since savings rates may reduce due to externalities in capital accumulation. Diffuse ownership may also negatively affect corporate governance and invariably the performance of listed firms, thus impeding the growth of stock markets.

 

Despite of alternative views empirical works continue to show largely some degree of positive relationship between stock markets and growth. These studies largely based on developed countries only. Only few studies have been conducted in context of Nepalese stock market, and those conducted studies do not show clear conclusion regarding its impact on economy. Yadhav (2002) finds that firms with higher investment have higher saving and higher capital formation. Though his study may be significant in other cases it is of less significance here. Similarly Wagle (2002) also carried out the study on trends of saving, investment, and capital formation in Nepal, but his study fails to provide any specific link between saving, investment and capital formation with stock market development. Similarly Sindhurakar (2004) has carried out the study on relationship between the stock market and economic growth without analyzing the econometric models.

 

The study specifically deals with the following issues:

1. What is the relationship between the Gross Domestic Product (GDP) and government investment, government expenses, foreign aid, savings, and foreign direct investment

2nd Is the market capitalization ratio of gross domestic product (GDP)?

3. What is the impact of concentration ratio on economic growth of a nation?

4. What is the significance of liquidity on economic growth? What is its impact in capital market?

5. Is there any co-integration between the stock development index and economic growth?

6. Is there any Granger causality between the stock development and economic growth?

7. Is the Levine and Zerovos model valid in underdeveloped nation like Nepal?

8. Can the small group of investors manipulate a Nepalese capital market easily?

9. How can the government able to develop the stock market in coming days?

 

One group of study argues that stock market does not help in economic development of a nation while the other group argues that it helps in economic development. However, empirical investigations of the link between financial development in general and stock markets and growth in particular have been relatively limited. Various empirical researches have suggested a possible connection between stock market development and economic growth, but are far from definitive.

 

1. 3. Objective of the Study

 

The main objective of this study is to examine the impact of stock market development in the economic development and growth of the nation in context to Nepal. The specific objectives of the study are as follows.

 

1. To conduct the empirical analysis of stock market by investigating the link between stock markets and economic growth.

 

2. To further analyze the link based on set of different variables of economic indicators and stock market indicators.

 

3rd To investigate the importance of liquidity for growth.

 

4. To analyze the impact of firm concentration ratio on economic growth.

 

5. To examine the validity of model of Levine and Zervo’s study on stock market in developing nation like Nepal.

 

6. To determine and analyze the co-integration and causality between the stock market development index and economic growth.

 

 

 

Chapter: 2 Review of Literature

 

2. 1 Review of Empirical Works

 

This section concerns with review of important empirical works, concerning stock market development and economic growth starting from 1873 to 2008. Some important studies and their finding are presented in tabular form in chorological order. The review of literature is undertaken in three sections. The first section focuses on the review of empirical works carried out before 1990s with their major findings. Similarly, the second section deals with the review of studies carried out during 1990s and finally third section deal with the review of studies during 2000.

 

2nd 1st An overview of empirical work, before 1990

 

During nineteenth and twentieth century, Bagehot (1873) and Schumpeter (1912) had focused on the constructive assistance of financial sector to economic growth. In the study the direction of causality between the higher growth in financial sector and country’s economic growth rate was not clear (Robinson, 1952 and Locus, 1988). In the wake of a large body of empirical evidence, considerable studies have made on modeling and understanding the strong positive linkages between real and financial development. Much of this research has followed the “functional” approach in the analysis of such linkages.

 

 

 

Table: 2. 1

Review of Empirical Works from 1873 to 1986

 

Study

Area

Major Findings

Bagehot (1873)

A description of money market with currency monopoly.

Constructive assistance of financial sector to economic growth.

Schumpeter (1912)

The theory of economic development.

Technological innovation is the force underlying long-run economic growth.

Robinson (1952)

 

The Generalization of the General Theory, in The Rate of Interest and Other Essays.

 

There is a two-way causal relationship between financial development and economic performance.

Goldsmith (1969)

Association between levels of financial development with economic growth.

A significant association between the level of financial development and economic growth.

 

The “finance-led growth” hypothesis postulates the “supply-leading” relationship between financial and economic developments. It is argued that the existence of financial sector and financial intermediations in channeling the limited resources from surplus units to deficit units would provide efficient allocation resources by leading the other economic sectors in their growth process. Indeed, a number of studies argued that the development of financial sector has significantly promoted economic development (Schumpeter, 1912). The study argued that the technological innovation is the force underlying long-run economic growth.

 

Robinson (1952), on the other hand, concluded that the economic growth creates a demand for various types of financial services to which the financial system responds. Goldsmith (1969) reported a significant association between the level of financial development (defined as financial intermediary assets divided by GDP) and economic growth. The study however recognized that there is no possibility of establishing the confidence for the direction of the causal mechanisms.

 

The earlier studies on international stock market linkages focused on the identification of short-term benefits of international portfolio diversification. The study of Levy and Sarnat (1970) and Solnik (1974), examined the short-term correlations of returns across national markets and pointed out the existence of substantial markets have high possibilities to diversify the risk internationally.

 

McKinnon  (1973) provided the evidences that liberalization of financial markets allows financial deepening which reflects an increasing use of financial intermediation by savers and investors and the monetization of the economy, which allows efficient flow of resources among people, and institutions over time. This encourages savings and reduces constraint on capital accumulation and improves in allocating efficiency of investment by transferring capital from less productive to more productive sectors.

 

Another group of studies concentrated on examining financial links among stock markets by using either bivariate or multivariate co-integration methodology. Taylor and Tonks (1989) were the first to apply bivariate co-integration on the UK and U. S. markets to test the importance of the abolition of foreign exchange controls in 1979. Furthermore, the empirical evidence was not conclusive, while a strong empirical causal relationship among the banking system, stock market development and economic performance was hardly established. Financial development is considered as a means to economic growth through various channels. An important role of financial intermediaries is to provide liquidity to individual investors (Diamond and Dybvig 1983). Similarly study of Stiglitz and Weiss, (1981); and Cho, (1986) concluded that the returns does not increase as the interest rate to borrowers rises.

 

 

 

 

 

Table: 2. 2

Review of Empirical Works from 1881 to 1986

 

Study

Area

Major findings

Shiller (1981)

 

Do stock prices move too much to Be Justified by Subsequent Changes in Dividends?

Price movements cannot be simply justified by changes in fundamentals.

Stiglitz and Weiss (1981)

Credit rationing in markets with imperfect information

Due to stagnant bank returns, increase in interest rate does not increase its return.

Diamond and Dybvig (1983)

A simple example, Federal Reserve Bank of Richmond.

An important role of intermediaries is to provide liquidity to individual investors.

Lucas (1988)

 

On the mechanics of economic development.

Not clear findings about the causality between financial sector and economic growth.

Taylor and Tonks (1989)

 

The internationalization of stock markets and the abolition of U. K. exchange control

There is multivariate co-integration on UK and US market.

Römer (1986)

Increasing returns and long-term growth

 

Increase in productivity will cause economic growth.

Cho (1986)

Inefficiencies from financial liberalization in the absence of well-functioning equity markets.

Returns do not increase as interest rate rises.

 

At the theoretical level, the study of stock markets and growth gave new impetus with analyses of the design of optimal financial contracts under asymmetric information in dynamic general equilibrium models. The study of Bernanke and Gertler, 1989 concluded that the evolution of the financial system led to financial contract which emerged to solve the problems of moral hazard. The study concluded that when the firms are in need of external finance face a cost minimization problem, which they must solve by issuing different forms of financial contracts under different circumstances.

 

2. 1. 2 Review of Empirical Works during 1990s

 

Stock exchanges are expected to increase the amount of savings channeled to corporate sector. Some evidence can be found in the work of Greenwood and Jovanovich (1990). Furthermore, the study concluded that the stock markets play an important role in allocation of capital to corporate sector that in turn stimulates real economic activity. Many countries are facing financial constraints particularly developing countries, where bank loans are restricted to some favorable groups of companies and personage investors. This limitation can also reflect constraints in credit markets (Mirakhor and Villanueva, 1990).

 

Table: 2 3

Review of empirical work from 1990 to 1991

 

Study

Region

Major Findings

Mirakhor and Villanueva (1990)

Market integration and investment barriers in emerging equity markets.

There are high constraints in credit markets.

Greenwood and Jovanovich (1990)

 

Financial development, growth, and the distribution of income.

Financial markets and financial institutions can affect capital accumulation.

Vishny (1990)

 

The stock market and investment.

Stock market on an aggregate level does not predict the future investment.

Levine (1991)

 

Equity markets, growth and fiscal policy.

Strong positive relationship between stock market liquidity, productivity improvements and capital accumulations.

Bencivenga and Smith (1991)

 

Financial intermediation and endogenous growth.

Financial agents can affect savings decisions by reducing liquidity costs.

 

The ability of financial intermediaries to offer a profitable investment for savers to build confidence and to take additional savings. Efficient functioning of financial intermediaries will increase production and create additional demand for deposits and financial services (Greenwood and Jovanović, 1990). Financial institutions, agents may reduce the liquidity-saving decisions, and provides greater opportunities to diversify risks (Bencivenga and Smith, 1991) interfere. Diversification of the portfolio on a stock exchange may be the additional effect of promoting the growth of specialization in production (in Saint-Paul, 1992) is.

 

In addition, some studies have found that the stock market, corporate governance can mitigate the principal-agent problem through between the owners and managers (Jensen and Murphy, 1990) to improve. However, other studies indicated that the stock market would negatively affect the facilitation of hostile takeovers and counterproductive (Vishny, 1990) is. In addition, some argue that the risks may be angry drivers that inhibit long-term investment, and thus inefficient resource allocation (Singh and Weiss, 1998) fu. In addition to some claim that stock markets are taking advantage of incentives are more effective than the banks of the information gathering and dissemination, and thus the quality of the investment tax channels and thus stimulate economic growth (Holmström and Tirole, 1994). On the contrary, I believe some of the other, the banks must have stock markets, they can monitor the investment management business and lower costs. They argue that the share is actually due to stock ownership and relatively small individual investors, they do not have the ability or the motivation to be expensive, but the necessary information In order to achieve efficient allocation of resources (Buy Bhide, 1993; Singh, 1993).

 

Contrary to traditional view, there are evidences that support the hypothesis that there exist long-run correlation between stock market development and economic growth. But in literature the testing of this hypothesis is rare for developing countries. However, Pardy (1992) in his seminal work has argued that in less developed countries capital markets are able to mobilize domestic savings and allocate funds more efficiently. Spears (1991) reported that in the early stages of development, financial intermediation induced economic growth. Demirguc-Kunt (1994) has supported the view that stock markets promote economic growth.

 

A number of subsequent studies adopted the growth regression framework in which the average growth rate in per capita output across countries is regressed on a set of variables controlling for initial conditions and country characteristics as well as measures of financial market development (King and Levine, 1993a). The study further analyzes the relationship between financial development and real GDP per capita growth, the rate of physical capital accumulation, and increases in efficiency over the period from 1960-89. The study measured the financial development by using the financial depth ratio (ratio of liquid liabilities to GDP), the level of banking, the ratio of credit issued to non-financial private firms to total credit and the ratio of credit issued to private firms to GDP. The study revealed that higher levels of financial development are positively associated with faster rates of economic growth and that the level of financial development is a good indicator of future growth prospects.

 

Robert Barro (1990) stated that if the U.S. stock and stock market variables, can largely be explained by following the total investment. In fact, Morck et al suggested (1990), the U.S. stock market is not much at the aggregate level predictor of future investment. The same study, Galeotti and Schiantarelli (1994), aggregated quarterly data from non-financial corporations sector in the U.S., so that investment is significantly affected by price volatility, regardless of whether the changes in the FAD or due to changes in fundamentals. showed, on the other side, the enterprise-level studies show that it is usually only a very limited impact on stock market investment (Abel and Blanchard, 1986; Morck, Shleifer and Vishny, 1990, Blanchard, Rhee and Summers, 1993).

 

Table: 2. 4

Review of Empirical Works from 1992 to 1993

 

Study

Area

Major Findings

Saint-Paul (1992)

Financial markets and economic development.

Stock markets have additional growth effect.

Pardy (1992)

Institutional reform in emerging securities markets.

 

In less develops countries the capial maket are able to mobilize domestic savings.

King and Levene (1993)

Finance and growth

Rate of physical capital accumulation has increased in efficiency over the period from 1960 to 1989.

Atje, and Jovanovic, (1993)

Stock market and development

Significant correlation between the stock markets and economic growth.

Pagano (1993)

 

Financial market and growth.

Financial growth can affect the rate of economic growth by altering productivity growth and the efficiency of capital.

Bhide (1993)

Hidden costs of stock market liquidity.

Highly liquid market may reduce the shareholders incentives to monitor managers.

 

Atje and Jovanovic (1993) concluded that there is a large effect of stock markets on economic growth but no relationship for bank lending on economic growth. Alternatively, Harris (1997) argued that the Atje and Jovanovic results are not supported by empirical results. Harris analyzed data for forty-nine countries over the period from 1980-91 for the growth in GDP per unit of effective labor, investment as a percent of GDP, the growth of total employed labor and the total value of shares traded on the stock market as a percent of GDP. The study reported that the level of stock market activity has little explanatory power in the sample of developing countries and weak explanatory power for the sample of developed countries. The study of Stiglitz (1994) provided the evidence that when the stock prices is determined by publicly available information then it help investors make better investment decisions. Better investment decisions by investors means better allocation of funds among corporations and, as a result, a higher rate of economic growth. In efficient capital markets prices already reflect all available information, and this reduces the need for expensive and painstaking efforts to obtain additional information.

Table: 2. 5

An overview of empirical work on 1995 AD

 

Study

Area

Major Findings

Bencivenga, Smith,and Starr (1995)

Transactions costs, technological choice and endogenous growth.

Theoretical predications on strong connections between stock market liquidity and fast growth.

Bencivenga et al. (1995)

Transactions costs, technological choice and endogenous growth

Enhanced stock market liquidity reduces the disincentives for investing in long duration and higher return projects since investors can easily sell their stake in the project.

Longin and Solnik (1995)

 

Is the correlation in international equity returns constant: 1960-1990?

By applying sophisticated techniques they found evidence of significant linkages between the stock markets around the world.

 

Hamao et al. (1990), Koch and Koch (1991), Roll (1992), Longin and Solnik (1995), used more sophisticated econometric techniques to measure cross-country correlations, and found evidence of significant linkages between stock markets around the world. Some other studies focused on the evolution of linkages of emerging capital markets. Studies such as Harvey (1995), but particularly Bekaert and Harvey (1995), examined one period returns and the conditional means and variances of one period returns by examining a one factor asset pricing model. The study concluded that the expected returns in a country are affected by their covariance with country’ returns. The study further concluded that if the market was perfectly integrated then only covariance counted, while if the market was completely segmented then the variance was the relevant measure of market risk. Bekaert and Harvey (1995) used a conditional regime-switching model to account for periods when national markets were segmented from world capital markets and when they became integrated later in the sample.

 

 

Table: 2. 6

Review of Empirical Work for 1996 AD

 

Study

Area

Major Findings

DEMETRIADES and Hussein (1996)

Does financial development cause economic growth?

There is bi-directionality and reverse causality between financial development and economic development.

 

Diamond (1996)

Financial intermediation as delegated monitoring: A simple example, federal reserve bank of Richmond

Financial intermediaries encourage highly productivity firms reducing informational asymmetries and costs.

 

Levine and Zervos (1996)

 

Stock market development and long-run growth.

Equity market activity is positively correlated with real activity measures.

Benchivenga, Smith and Starr (1996)

 

Equity markets, transaction costs and capital accumulation.

Positive role of liquidity provided by stock exchanges on real asset investments.

 

There are not much empirical research investigating causal relationships between stock exchanges and economic growth. One study worth mentioning here belongs to Levine and Zervos (1996). The study applied regression analysis to the data compiled from 41 countries for the years 1976 through 1993 to see the relationships between financial deepening and economic growth. One of the financial deepening indicators used in the analysis was the level of development of stock exchange measured by a composite index, liquidity and diversification indicators. Economic growth indicator selected, on the other hand, was the real growth rate in per capita GDP. Levine and Zervos reported a very strong positive correlation between stock market development and economic growth. The most interesting aspect of this study was the decrease in the statistical significance of other financial deepening variables after stock market development index was included in regression equation. The study concluded with the proof that stock market development is more influential than other financial deepening indicators on the growth of the economy.

 

Traditional growth theorists believed that there is no correlation between stock market development and economic growth because of the presence of level effect not the rate effect. Singh (1997) contended that stock markets are not necessary institutions for achieving high levels of economic development. The study focused on the rapid growth of stock markets in the liberalization process in developing countries over the 1980s and 1990s and argued that financial liberalization (making the financial system more fragile) is not likely to enhance long-term growth. Singh and Weis (1999) viewed stock market as a agent that harm economic development due to their susceptibility to market failure, which is often manifest in the volatile nature of stock markets in many developing countries. The traditional assessment model of stock prices and the wealth effect provided hypothetical explanation for stock prices to be proceeded as an indicator of output (Comincioli, 1996). According to wealth effect, however, changes in stock prices cause the variation in the real economy.

 

Although empirical tests of the relationship between financial development and economic development are not consistent, the bulk of the evidence supports a relationship between financial development and economic development. Demetriades and Hussein (1996) found the evidence of both bi-directionality and reverse causality by using unit root tests, co-integration tests and vector auto-regression tests of causality. The study concluded that financial development causes economic growth, economic growth causes financial system development, and in some cases, the causality is in both directions. As independent variables, the study has used the ratio of bank deposit liabilities to nominal GDP and the ratio of bank claims on the private sector to nominal GDP. The dependent variable is real GDP per capita in local currency terms. Rajan and Zingales (1998) predicted the average annual real growth of value added in an industry in the United Stated over the period from 1980-90. As predictor variables the study used the proportion of investments funded with external financing and the ratio of capital spending to net property, plant, and equipment. Industries were further divided into young and old companies. This process helped them to differentiate industries that were more or less dependent on external financing. The study wanted to test if financially dependent industries perform better in countries that have more developed financial sectors. As measures of financial development in each of forty-one countries. The study used the ratio of domestic credit plus stock market capitalization to GDP, the ratio of domestic credit to the private sector relative to GDP, and an index of accounting transparency. They study revealed that the financial development facilitates economic development by providing cheaper funds to growing industries.

 

 

 

Table: 2. 7

Review of Empirical Works from 1997 to 1999 AD

 

Study

Area

Major Findings

Harris (1997)

Stock markets and development

Level of stock market activity has little explanatory power in the developing country sample and weak explanatory power for the developed country sample.

Singh (1997) and Weis (1999)

Financial liberalization, stock markets and economic development.

Stock market is a agent that harm economic development due to their susceptibility to market failure.

Raguraman and Zingales (1998)

Financial dependence and growth.

Financial developmet facilitates economic development  by providing cheaper funds to growing industries.

Levine and Zervos (1998)

Stock exchanges, banks and economic growth.

A strong and statistically significant link between the stock and the GDP.

Luitel and Khan (1999)

A quantitative reassessment of the finance-growth nexus.

Financial development is very supportive to economic development.

 

The development of endogenous growth theory in recent years has offered the opportunity to define and explain the link between financial development and economic growth. The study of Pagano (1993) and Levine (1997) concluded that the financial development could affect the rate of economic growth by altering productivity growth and the efficiency of capital. It also affects the accumulation of capital through its impact on the saving rate or by altering the proportion of saving.

 

Benchivenga et al (1996) emphasized that there is positive role of liquidity provided by stock exchanges on the size of new real asset investments through common stock financing. Investors are more easily persuaded to invest in common stocks, when there is little doubt on their marketability in stock exchanges. Some contrary opinions do exist regarding the impact of liquidity on the volume of savings, arguing that the desire for a higher level of liquidity works against propensity to save (Benchivenga and Smith, 1991), (Japelli and Pagano 1994), such arguments were not well supported by empirical evidence. The second important contribution of stock exchanges to economic growth is through global risk diversification opportunities. Saint-Paul (1992), Deveraux and Smith (1994) and Obstfeld (1994) argue quite reasonably that opportunities for risk reduction through global diversification make high-risk high-return domestic and international projects viable and consequently, allocate savings between investment opportunities more efficiently. Whether global diversification might reduce the rate of domestic savings (Deveraux & Smith 1994) seemed to be a weak argument, as it is not convincingly evidenced.

 

Levine and Zervos (1998) analyzed by using stock market liquidity (turnover of shares and value), size (market capitalization), volatility (twelve month rolling standard deviation), integration with world markets (CAPM and APT intercept terms), and bank credit for the private (bank credit to the private sector to GDP) as predictors of economic growth, capital accumulation, improvement in productivity, and savings growth rates for forty-seven countries from 1976-93. The study reveals a positive relationship between stock market and bank development and economic growth, capital accumulation, and productivity growth. The authors conclude that stock markets provide an easy means to trade the ownership of productive assets, which facilitates resource allocation, which, in turn, facilitates capital formation, which leads to faster economic growth.

           

In the framework of the new growth theory, surprisingly few empirical studies of the relation between stock market and economic growth are available. The one important study mentioned earlier is one by Levine and Zervos (1998) who are among the first to ask whether stock markets are merely burgeoning casinos or a key to economic growth and to examine this issue empirically, finding a positive and significant correlation between stock market development and long run growth. The work of Luintel and Khan (1999), among others, is supportive of this view.

 

2. 1. 3 Review of Literature during 2000

 

Empirical work over the past two decades, mostly under the role of financial sector development to stimulate economic growth focus, despite the stock market development. The evolution of the stock market has impact on the operation of credit and hence economic support. This means that the backup is always important, especially in many emerging economies and their role should not be ignored (and Senhadji Khan, 2000).

 

Beck et al (2000) analyzed the relationship between financial development and economic growth, total factor productivity growth, physical capital accumulation rates

and private savings rates. The study reported that there is a large positive effect of financial intermediaries and total factor productivity growth and economic growth but a lesser effect for long-term economic growth and total factor productivity growth.

 

Würgler (2000) examines the relationship between financial markets and the allocation of capital from 1963 to 1995 sixty-five countries. The study found that countries, more developed financial markets, capital-intensive industries are growing, and fall away from the industries. Effectiveness is inversely proportional to the Treasury’s financial system and economy are directly related to the availability of information on business and law enforcement action in relation to outside & # xE4; again.

 

Table: 2 8

Review of Empirical Work from 2000 to 2004 AD

Study

Area

Major Findings

Beck, Levene and Loayza (2000)

Financial and growth opportunities.

There is a large positive effect of financial intermediaries and total factor productivity growth.

Wurgler (2000)

Financial market and allocation of capital.

The efficiency of financial system is inversely related to information availability for firms and legal protections for minority stockholder.

Arestis et al. (2001)

Financial development and economic growth.

Both stock market and bank may be able to help in economic development.

Bell and Rausseau (2001)

Case of the industrialization of Finance

Financial development in India has instrumental role for promoting economic performance.

 

Mishkin (2001) and Caporale et al (2004)

Financing, savings, capital and risk.

Financing productive projects mobilize domestic savings, allocate capital and diversify the risk, facilitate exchange of goods and services.

 

 

Tuncer and Alovsat (2001) examined stock market-growth nexus and exhibited positive casual correlation between stock market development and economic activities. Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth. The study of Phylaktis and Ravazzolo (2001) measured financial linkages by analyzing the covariance of excess returns on national stock markets of emerging economies. A major advantage of this framework is that by examining the co-movement of future returns aggregated over a long horizon instead of the co-movement of one period expected returns one can detect small but persistent movements in expected returns and more accurately measure the degree of financial integration than one period stock return regression models.

 

The study of (Arestis, Demetriades and Luintel, 2001) found that in countries like Germany, stock market volatility has a significant and negative impact on growth. Another point worthy of note is that studies based on a cross-country framework in general have omitted China due to lack of data. Needless to say that given the increasing role of China in the world economy, understanding China is important in its own right. The study used a vector autoregressive model to study the relationship between stock market development measures and economic growth for developed economies, controlling for the banking sector development. The study finds that the stock market and economic growth both may be able to promote growth, with the impact of the banking system being stronger. With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau and Wachtel, 2000; Beck and Levine, 2003).

 

Mishkin (2001) and Caporale et al (2004) provided the evidence that an organized and managed stock market stimulate investment opportunities by recognizing and financing productive projects that lead to economic activity, mobilize domestic savings, allocate capital proficiency, help to diversify risks, and facilitate exchange of goods and services. Undoubtedly, stock markets are expected to increase economic growth by increasing the liquidity of financial assets, make global and domestic risk diversification possible, promote wiser investment decisions, and influence corporate governance, that is, solving institutional problems by increasing shareholders’ interest value (Vector, 2005).

 

Bell and Rousseau (2001) evaluated the relationship between individual macroeconomic indicators and measures of financial development in India and revealed that the financial sector has been instrumental in promoting economic performance. Nourzad (2002) analyzed the effect of financial development on productive efficiency using eight measures of financial development for countries at different stages of economic development. The study analyzed three sets of panels of data: annual data for twenty-nine countries from 1966-90, annual data for eighteen countries from 1970-90, and five year average data for twenty-eight countries from 1970-90. The author finds that productive efficiency is greater in countries that have more developed financial sectors.

 

Table: 2 9

Review of Empirical Works from 2005 to 2007 AD

 

Study

Area

Major Findings

Shrestha (2005)

Stock market and economic development.

Gross Domestic Product influence stock market.

Vinhas de Souza (2005)

 

Financial liberalization and business cycles: The experience of the new EU member states.

Capital market reform programs, government approved new laws are regulatory framework for capital market flourish.

Siliver and Duong (2006)

Role of stock market for real economic activity: evidence for Europe.

Stock market has certain predictive content for real economic growth.

Yartey and Adjasi (2007)

 

Stock market development in Sub-Saharan Africa: Critical issues and challenges

African stock market facing challenge of integration and need better technical and institutional development to address the problem of low liquidity.

 

Efficient stock markets provided guidelines to keep appropriate monetary policy through the issuance and repurchase of government securities in the liquid market, which is an important step towards financial liberalization. Similarly, well-organized and active stock markets could modify the pattern of demand for money, and would help create liquidity that eventually enhances economic growth (Caporale et al, 2004). Similarly, Siliverstovs and Duong (2006) revealed that the accounting for expectations has represented by the economic sentiment indicator in which stock market has certain predictive content for the real economic activity.

 

Paudel (2005) acknowledged that stock markets, due to their liquidity, enable firms to attain much needed capital quickly, hence facilitating capital allocation, investment and growth. Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle-income economies. Bahadur and Neupane (2006) concluded that stock markets fluctuations helps in the prediction of the future growth of an economy.

 

 

2nd 1st 4 Summary

 

From the above, it may be seen that the effect of capital markets on economic growth has been a controversial subject. Some studies indicated the statistically significant effect of stock market development on economic growth while others did not. Similarly, some reported positive impact of stock liquidity on economic growth while some did not. In order to validate one view or the other in Nepalese context, no study has been so far conducted by using the recent data by considering Deminigue-Kunt and Levene’s stock market development index. This study therefore tests the above hypothesis concerning stock market development and economic growth in undeveloped country, Nepal.

 

 

 

Chapter 3: Research Methodology

 

3. 1 Research Design

 

For the analysis of relationship between the stock market development and economic growth descriptive, co-relational and time series research design will be employed. For the purpose of conceptualization and description, the descriptive research design is going to be used. For the analysis purpose the study covers the time period of ten years. This study will be made on a macro level so it consists of all the sectors including commercial banks, manufacturing and processing organization, hotel sectors, trading, insurance, finance companies and, development banks and so on.

 

3. 2 Nature and Sources of Data

 

This study will base on both primary and secondary data. Most of the data related to economic growth and stock market development will be collected from annual report and official reports of concerned organization. The required information will  be  supplemented by Ministry of Finance, Department of Industries, Commerce and Supplies, economic survey published by Nepal Government, quarterly economic bulletin published by Nepal Rastra Bank (NRB), National Planning Commission and Security Board of Nepal (SEBON), World Bank Report will be considered.

 

A field survey based on questionnaire and interview will also be conducted to collect opinions of different respondents in three groups. The respondents selected for the survey will be stock investors, general student and public who have not invested in shares to obtain the information in respect of economic performance and stock market development.

 

3. 3 Selection of Enterprises

 

The study is related to aggregate values so aggregate values of economy that is determinants of macroeconomic indicators and aggregate value of market activities that is determinants of stock market developments are going to be selected.

 

3. 4 Methods of Analysis

 

Analysis is the systematic and careful examination of available facts so that certain conclusions can be drawn from it. The major part of the study is based on the testing of association of stock market and economic growth.

 

3. 4. 1 Econometric Model

 

This study is heavily based on Levine and Zervos’s study on stock market development and long run growth. However, their study is based on cross-country regression, but this study considers time series analysis and single equation regression applied to the collected data.

 

Study will determine the casual relation between stock market development and economic growth then determine how they evolve over time and finally seek the relationship between the stock market development and its economic performance. Levine and Zervos (1996) suggested the following equation to evaluate whether there is any relationship between the stock market development and long run economic growth.

 

GDPt = ax + + bSTOCKt ìt, & # xA0;, & # xA0;, & # xA0 (1)

 

Where GDP Growtht is the Gross Domestic Product growth rate and Xt is a set of control variables that is associated with GDP. These variables include government expenditure (EXPN), Public Investment (INV), public development aid (AID), foreign direct investment (FDI). In the same way STOCKt represents stock market development index. It includes market capitalization ratio (Mcap), liquidity ratio (Liquidt) and concentration ratio (Conct). A and B are unknown parameters to be estimated and Mt is an error term. We can consider the following equations in details.

 

GDPt = a1 Xt + b1 Mcapt + b2 Liquidt + b3 Conct + µt                                                               (2)

 

Government expenditure is selected as control variables because in underdeveloped country, government plays key role in economic growth for driving the different productive activities. Thus it can impact positively as well as negatively on economic growth. Public investment is selected as a control variable because if the public investment policy is directed correctly (for instance towards infrastructures development), it can impact significantly on economic growth, since public investment can target health, education, etc. , which all contribute to increase total factor productivity. Public development aid is selected because in developing countries savings is inadequate so development aid is an ‘oxygen pipe’ for nation’s development. Foreign direct investment is taken because it measures the private investment as domestic investment is very low as compared to it so it is ignored here.

 

The Liquidity ratio variable represents the turnover ratio measured as the value of total shares traded divided by market capitalization (high turnover then high liquidity). Liquidity allows investors to easily buy and sell securities. As Levine and Zervos (1996) put it, stock markets may affect economic activity through their liquidity since investors are reluctant to relinquish control of their saving for long periods. Market capitalization ratio, which equals the value of listed shares divided by GDP, is taken as the indicator for stock market development. This ratio measures the stock market size, ability to mobilize the capital and helps to diversity the risk. Concentration ratio is the four firm concentration ratios, which is measured by dividing market capitalization of four largest stocks by total market capitalization. If few companies dominate the market, they can manipulate the price formation process. Thus a high concentration ratio is not desirable. Countries with highly concentrated markets have markets that are underdeveloped. So market concentration is hypothesized to be negatively correlated with market size and market liquidity.

 

3. 4. 2 Correlation Analysis

 

Correlation analysis to determine whether a series of selected variables have no relationship or it is not necessary. If there is no causal link between the shortage, then this test is necessary.

 

A mathematical formula for measuring the correlation developed by Pearson is as follows.

 

                  (3)

 

Where r is a correlation coefficient, Xt and Yt are two variables whose correlation is to be calculated. Correlation is a measure of the relation between two or more variables. The measurement scales range from -1. 00 to +1. 00. The value of -1. 00 represents a perfect negative correlation, while a value of +1. 00 represents a perfect positive correlation. A value of 0. 00 or close to zero represents a lack of correlation.

 

3. 4. 3 Time Series Analysis of the Data

           

For the data analysis purpose the following time series analysis is made. They are as follows.

 

3. 4. 3. 1 Unit Root Tests:

 

According to Nelson and Plosser (1982), Chowdhury (1994) there exists unit roots in most macroeconomic time series.   While dealings with time series, it is necessary to analyze whether the series are stationary or not. Since regression of non-stationary series on other non-stationary series leads to what is known is spurious regression causing inconsistency of parameter estimate (Engle and Yoo, 1987). The hypothesis behind is that random shocks in economy have long lasting effects (Engle & Granger, 1987). The most popular of these tests are the Augmented Dickey-Fuller (ADF) test and the Phillips-Perron (PP) tests. ADF test will be considered for this study because ADF tests use a parametric autoregressive structure to capture serial correlation.

 

3. 4. 3. 2 Co-integration Test

 

The finding that many macro time series may contain a unit root has spurred the development of the theory of non-stationary time series analysis. Engle and Granger (1987) pointed out that a linear combination of two or more non-stationary series may be stationary. If such a stationary linear combination exists, the non-stationary time series are said to be co-integrated. The stationary linear combination is called the co-integrating equation and may be interpreted as a long-run equilibrium relationship among the variables. The purpose of the co-integration test is to determine whether a group of non-stationary series is co-integrated or not. Eviews5 statistical software implements VAR-based co-integration tests using the methodology developed in Johansen (1991, 1995a).

 

There are two different methods for testing for co-integration, Engle & Granger (1987) and Johansen (1988). Jung and Seldon (1995) state that the Johansen co-integration test is more valid as there is no need of prior knowledge of the co-integration vectors, in cases when they are unknown. As this study does not have the co-integration vectors it is better to use the Johansen (1988) test. The Johansen methodology utilizes Vector Auto Regression (VAR) to test the co-integration. The Johansen (1988) method of testing for the existence of co-integrating relationships has become standard in the econometrics literature because of its superiority over other alternatives.

 

3rd 4th 3rd 3 Granger-causality of economic growth and stock market development

 

Measuring the correlation (similarities in strength and direction between two graphs) between variables such as GDP and STOCK would according to Granger (1969) not be enough to construct a complete understanding about the relationship between two time series. The reason is that some correlations may be spurious and not useful, as there might be a third variable that cannot be accounted for. For example there is a correlation between teacher’s salaries in the UK and the consumption of alcohol in the UK. Another example is that ice cream sales are correlated to shark attacks on swimmers (Lethen, 1996). In both examples it would be highly unlikely that one causes the other but that there exists other hidden variables affecting both. There is a correlation but no causal connection.

 

By using the Granger causality approach with the question if variable X (in a time series), causes variable Y (in another time series), a researcher wants to see how the value of the existing Y can be explained by past values of Y. And then by adding lagged values of X add to explanation of the relationship (Eviews 5. 0 statistical software)

 

This does in practice imply that if you find a variable that is Granger causing another variable in a certain direction or both, manipulation of one would affect the other.   To reduce spurious results the process of finding Granger causality also involves finding out other relations between the time series and such relations include looking at correlation and co-integration (Sahlin and Sjogren, 2008). So this study is not only looking at the correlation, co-integration and causality but also looking at a further developed relationship between the time series. This is combined to produce an answer to if there is a relationship between the variables. Hence, in this study the word relationship stated by statistical software is used as a generic term for the combined correlation, co-integration and causality time series. For the calculation purpose the following equations have to be estimated.

 

3. 4. 4. 4 Other Statistical Tools Considered

 

For our data presentation and analysis other statistical tools will be. They are mean, median, standard deviation, maximum and minimum, T-test, F-test and Standard Error of Estimate (SEE).

 

 

 

Chapter 4: Concluding the research proposal

 

There are many studies that have examined the relationship between growth and stock markets using either cross country or panel methods. However their empirical approach typically suffers from serious econometric weakness. Traditional growth theorists believed that there is no correlation between stock market development and economic growth. Singh (1997) argues that stock markets are not necessary institutions for achieving high levels of economic development. Some recent studies have stated that stock markets play an important role in allocation of capital to corporate sector that in turn stimulate real economic activity. Studies of Caporale (2004), Vector (2005), Mishkin (2001) and few other studies too state that an organized and managed stock market stimulates economic activities. Most of these studies have reported positive effects of stock on economic growth. One group of study argues that stock markets do not help in economic development of a nation while the other group argues that it help in economic development.

 

This contrasting view that this study attempts to link the possible development of stock markets and economic growth in Nepal can be obtained. Variables are selected for the study, the gross domestic product (GDP), government investment (INV), government expenditure (EXPN), foreign aid (AID), foreign direct investment (FDI), the ratio of market capitalization (MCAP), the concentration ratio ( load capacity) and liquidity (LIQDT).

 

 

 

 

Abel, Andrew B. and Blanchard, Olivier J. (March 1986), “The Present Value of Profits and Cyclical Movements in Investment. ” Econometrica, Vol. 54, No. 2, pp. 249-273.

 

Adjasi, Charles K. D. and Nicholas B. Biekpe (2005), “Stock Market Development and Economic Growth: The Case of Selected African Countries. ”  Working Paper, African Development Bank.

 

Arestis, Philip; Demetriades, Panicos O; and Luintel, Kul B. (2001), “Financial Development and Economics Growth: The Role of Stock Markets. ” Journal of Money, Credit, and Banking, Vol. 33, No. 1, pp. 16-41.

 

Atje, Raymond and Jovanovic, Boyan (April 1993), “Stock Markets and Development. ” European Economic Review, Vol. 37 No. 2/3, pp. 632-40.

 

Bagehot, Walter (1873), A Description of Money Market with Currency Monopoly, Homewood, Lombard Street, 1962 Edition.

 

Barro, Robert (1990), “The Stock Market and Investment. ” Review of Financial Studies, Vol. 3, No. 1, pp. 115-131.

 

Bastola, P. (2003), Impact of Stock Market in Development, unpublished Masters Dissertation, Faculty of Management, Tribhuvan University.

 

Beck, Thorsten, Ross Levine and Norman Loayza (2000), “Finance and the Sources of Growth. ” Journal of Financial Economics, Vol. 58, pp. 261-300.

 

Beck, T. and R. Levine (2003), “Stock Markets, Banks, and Growth: Panel Evidence. ” Journal of Banking and Finance.

 

Bekaert, G. and C. R. Harvey (1995), “Time-Varying world market integration. ” Journal of Finance, Vol. 50, pp. 403-444.

 

Bell C. and P. L. Rousseau (2001), “Post-Independence in India: A Case of Finance Lend Industrialization. ” Journal of Development Economics Vol. 65, pp. 153-175.

 

Bencivenga, V. R. and Smith B. (1991), “Financial Intermediation and Endogenous Growth. ” Review of Economic Studies, Vol. 58, pp. 195-209.

 

Bencivenga, V. R. ; Smith, B. and Starr, R. M. (1996), “Equity Markets, Transaction Costs, and Capital Accumulation: An Illustration. ” The World Bank Economic Review, Vol. 10 No. 2, pp. 241-265.

 

Bernanke, B. and M. Gertler (1989), “Agency Costs, Net Worth, and Business Fluctuation. ” American Economic Review, Vol. 79, pp. 14-31.

 

Bhide, Amar (August 1993), “The Hidden Costs of Stock Market Liquidity,” Journal of Financial Economics, Vol. 34, No. 2, pp. 31-51.

 

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Capora


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 Proposal Writing for:

 

STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM UNDERDEVELOPED NATION (Nepal)

 

 

By

Jyoti Koirala (get2jyoti@gmail. com)

 

 

 

A Research Proposal Submitted to:

Faculty Members

Business or Economics Departmen

 

  

August, 2009

 

 

 

1st Chapter I: Introduction

 

1. 1. General Background

 

Stock market development has an important role in economic development. Shahbaz and his friends (2008) argue that stock market development is an important bike for growth, because it is a long term relationship between stock market development and economic growth. Stock market development has a direct impact on corporate finance and economic development.

 

Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth.

 

Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development.

 

Similarly Mishkin (2001) states that a well-developed financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services

 

From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market.

 

Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Varoudakis, 1996).

 

Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (Demirguc-Kunt and Levine (1996a).  Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth.

 

In underdeveloped like Nepal the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets can play a role in inducing economic growth in less developed country like Nepal by channeling investment where it needed from public.   Mobilization of such resources to various sectors certainly helps in economic development and growth. Stock market development has assumed a developmental role in global economics and finance because of their impact they have exerted in corporate finance and economic activity. The role of financial system is considered to be the key to economic growth (Neupane, et. al. 2006).

 

Paudel (2005) states that stock markets, due to their liquidity, enable firms to acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies.

 

Tuladhar (1996) states that financial markets are catalyst in the development of economy. The study further added that developed economies have highly sophisticated financial institutions. Over the past decade, many developing economies have established capital markets as they moved towards more liberal economic policies. These emerging markets have shown extraordinary growth with very high volatility, which have attracted many investors into these markets.

 

This study will attempt to dig out the empirical evidence in the context of underdeveloped nations regarding the role of stock market development on economic growth. 1. 2. Statement of the Problem:

 

In the last two decades, the link between financial intermediation and economic growth is a subject of high interest among academics, policy makers and economists around the world. There have been attempts to empirically assess the role of stock market and economic growth. The link between stock market and growth has varied in methods and results. There exists two controversies in the predictions.

 

Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle-income economies. In the same way, Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth Arestic et al. (2001) using time-series on five industrialized countries also indicate that stock markets play a role in growth. Various studies such as Spears, (1991); Levine and Zervos, (1998); Atje and Jovanovic, (1993); Comincioli, (1996); Levine and Zervos, (1998); Filer et al, (1999); Tuncer and Alovsat, (2001). Levine and Zervos (1995) and, Demirguc-Kunt (1994) has supported the view . stock markets promote economic growth. . With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau & Wachtel, 2000; Beck & Levine, 2003). Bahadur and Neupane (2006) concluded that stock markets fluctuations predicted the future growth of an economy and causality is found in real variables.

 

There are also alternate views about the role stock markets play in economic growth. Apart from the view that stock markets may be having no real effect on growth, there are theoretical constructs that show that stock market development may actually hurt economic growth. For instance, Stiglitz (1985, 1994), Shleifer and Vishny (1986), Bencivenga and Smith (1991) and Bhide (1993) note that stock markets can actually harm economic growth. They argue that due to their liquidity, stock markets may hurt growth since savings rates may reduce due to externalities in capital accumulation. Diffuse ownership may also negatively affect corporate governance and invariably the performance of listed firms, thus impeding the growth of stock markets.

 

Despite of alternative views empirical works continue to show largely some degree of positive relationship between stock markets and growth. These studies largely based on developed countries only. Only few studies have been conducted in context of Nepalese stock market, and those conducted studies do not show clear conclusion regarding its impact on economy. Yadhav (2002) finds that firms with higher investment have higher saving and higher capital formation. Though his study may be significant in other cases it is of less significance here. Similarly Wagle (2002) also carried out the study on trends of saving, investment, and capital formation in Nepal, but his study fails to provide any specific link between saving, investment and capital formation with stock market development. Similarly Sindhurakar (2004) has carried out the study on relationship between the stock market and economic growth without analyzing the econometric models.

 

The study specifically deals with the following issues:

1. What is the relationship between the Gross Domestic Product (GDP) and government investment, government expenses, foreign aid, savings, and foreign direct investment

2. Is there any relationship between the market capitalization and Gross Domestic Product (GDP)?

3. What is the impact of concentration ratio on economic growth of a nation?

4. What is the significance of liquidity on economic growth? What is its impact in capital market?

5. Is there any co-integration between the stock development index and economic growth?

6. Is there any Granger causality between the stock development and economic growth?

7th Whether the model applies Zerovos Levine and underdeveloped country like Nepal?

8th Can a small group of investors in the capital of Nepal easily manipulated?

9. How can the government able to develop the stock market in coming days?

 

One group of study argues that stock market does not help in economic development of a nation while the other group argues that it helps in economic development. However, empirical investigations of the link between financial development in general and stock markets and growth in particular have been relatively limited. Various empirical researches have suggested a possible connection between stock market development and economic growth, but are far from definitive.

 

1. 3. Objective of the Study

 

The main objective of this study is to examine the impact of stock market development in the economic development and growth of the nation in context to Nepal. The specific objectives of the study are as follows.

 

1. To conduct the empirical analysis of stock market by investigating the link between stock markets and economic growth.

 

2. To further analyze the link based on set of different variables of economic indicators and stock market indicators.

 

3. To examine the importance of liquidity for the economic growth.

 

4. To analyze the impact of firm concentration ratio on economic growth.

 

5. To examine the validity of model of Levine and Zervo’s study on stock market in developing nation like Nepal.

 

6. To determine and analyze the co-integration and causality between the stock market development index and economic growth.

 

 

 

Chapter: 2 Review of Literature

 

2. 1 Review of Empirical Works

 

This section concerns with review of important empirical works, concerning stock market development and economic growth starting from 1873 to 2008. Some important studies and their finding are presented in tabular form in chorological order. The review of literature is undertaken in three sections. The first section focuses on the review of empirical works carried out before 1990s with their major findings. Similarly, the second section deals with the review of studies carried out during 1990s and finally third section deal with the review of studies during 2000.

 

2. 1. 1 Review of Empirical Works before 1990s

 

During nineteenth and twentieth century, Bagehot (1873) and Schumpeter (1912) had focused on the constructive assistance of financial sector to economic growth. In the study the direction of causality between the higher growth in financial sector and country’s economic growth rate was not clear (Robinson, 1952 and Locus, 1988). In the wake of a large body of empirical evidence, considerable studies have made on modeling and understanding the strong positive linkages between real and financial development. Much of this research has followed the “functional” approach in the analysis of such linkages.

 

 

 

Table: 2. 1

Review of Empirical Works from 1873 to 1986

 

Study

Area

Major Findings

Bagehot (1873)

A description of money market with currency monopoly.

Constructive assistance of financial sector to economic growth.

Schumpeter (1912)

The theory of economic development.

Technological innovation is the force underlying long-run economic growth.

Robinson (1952)

 

The Generalization of the General Theory, in The Rate of Interest and Other Essays.

 

There is a two-way causal relationship between financial development and economic performance.

Goldsmith (1969)

Association between levels of financial development with economic growth.

A significant association between the level of financial development and economic growth.

 

The “finance-led growth” hypothesis postulates the “supply-leading” relationship between financial and economic developments. It is argued that the existence of financial sector and financial intermediations in channeling the limited resources from surplus units to deficit units would provide efficient allocation resources by leading the other economic sectors in their growth process. Indeed, a number of studies argued that the development of financial sector has significantly promoted economic development (Schumpeter, 1912). The study argued that the technological innovation is the force underlying long-run economic growth.

 

Robinson (1952), on the other hand, concluded that the economic growth creates a demand for various types of financial services to which the financial system responds. Goldsmith (1969) reported a significant association between the level of financial development (defined as financial intermediary assets divided by GDP) and economic growth. The study however recognized that there is no possibility of establishing the confidence for the direction of the causal mechanisms.

 

Earlier studies of international stock markets, the identification of compounds in short-term benefits of international diversification of the portfolio is concentrated. Study, Levy and Sarnat (1970) and Solnik (1974) investigated the short-term correlations of returns across national markets, which highlighted the major markets is a great opportunity to diversify the risk of Mo and internationally.

 

McKinnon  (1973) provided the evidences that liberalization of financial markets allows financial deepening which reflects an increasing use of financial intermediation by savers and investors and the monetization of the economy, which allows efficient flow of resources among people, and institutions over time. This encourages savings and reduces constraint on capital accumulation and improves in allocating efficiency of investment by transferring capital from less productive to more productive sectors.

 

Another group of studies concentrated on examining financial links among stock markets by using either bivariate or multivariate co-integration methodology. Taylor and Tonks (1989) were the first to apply bivariate co-integration on the UK and U. S. markets to test the importance of the abolition of foreign exchange controls in 1979. Furthermore, the empirical evidence was not conclusive, while a strong empirical causal relationship among the banking system, stock market development and economic performance was hardly established. Financial development is considered as a means to economic growth through various channels. An important role of financial intermediaries is to provide liquidity to individual investors (Diamond and Dybvig 1983). Similarly study of Stiglitz and Weiss, (1981); and Cho, (1986) concluded that the returns does not increase as the interest rate to borrowers rises.

 

 

 

 

 

Table: 2. 2

Review of Empirical Works from 1881 to 1986

 

Study

Area

Major Findings

Shiller (1981)

 

Do stock prices move too much to Be Justified by Subsequent Changes in Dividends?

Price movements cannot be simply justified by changes in fundamentals.

Stiglitz and Weiss (1981)

Credit rationing in markets with imperfect information

Due to stagnant bank returns, increase in interest rate does not increase its return.

Diamond and Dybvig (1983)

A simple example, Federal Reserve Bank of Richmond.

An important role of intermediaries is to provide liquidity to individual investors.

Lucas (1988)

 

On mechanics of economic development.

Not clear findings about the causality between financial sector and economic growth.

Taylor and Tonks (1989)

 

The internationalization of stock markets and the abolition of U. K. exchange control

There is multivariate co-integration on UK and US market.

Romer (1986)

Increasing returns and long run growth

 

Increase in productivity will cause economic growth.

Cho (1986)

Inefficiencies from financial liberalization in the absence of well-functioning equity markets.

Returns do not increase as interest rate rises.

 

At the theoretical level, the study of stock markets and growth gave new impetus with analyses of the design of optimal financial contracts under asymmetric information in dynamic general equilibrium models. The study of Bernanke and Gertler, 1989 concluded that the evolution of the financial system led to financial contract which emerged to solve the problems of moral hazard. The study concluded that when the firms are in need of external finance face a cost minimization problem, which they must solve by issuing different forms of financial contracts under different circumstances.

 

2. 1. 2 Review of Empirical Works during 1990s

 

Stock exchanges are expected to increase the amount of savings channeled to corporate sector. Some evidence can be found in the work of Greenwood and Jovanovich (1990). Furthermore, the study concluded that the stock markets play an important role in allocation of capital to corporate sector that in turn stimulates real economic activity. Many countries are facing financial constraints particularly developing countries, where bank loans are restricted to some favorable groups of companies and personage investors. This limitation can also reflect constraints in credit markets (Mirakhor and Villanueva, 1990).

 

Table: 2. 3

Review of empirical work from 1990 to 1991

 

Study

Area

Major Findings

Mirakhor and Villanueva (1990)

Market integration and investment barriers in emerging equity markets.

There are high constraints in credit markets.

Greenwood and Jovanovich (1990)

 

Financial development, growth, and the distribution of income.

Financial markets and financial institutions can affect capital accumulation.

Vishny (1990)

 

The stock market and investment.

Stock market on an aggregate level does not predict the future investment.

Levine (1991)

 

Stock markets, growth, and tax policy.

Strong positive relationship between stock market liquidity, productivity improvements and capital accumulations.

Bencivenga and Smith (1991)

 

Financial intermediation and endogenous growth.

The funds can be reduced by saving decisions affect liquidity.

 

The ability of financial intermediaries to offer profitable investments enhances savers’ confidence and attracts additional savings. The efficient operation of financial intermediaries leads to output growth and generates additional demand for deposits and financial services (Greenwood and Jovanovic, 1990). Financial institutions can affect agents’ savings decisions by reducing liquidity costs and offering greater opportunities for diversifying risks (Bencivenga and Smith, 1991). Portfolio diversification, through the stock market, may have an additional growth effect by encouraging specialization of production (Saint-Paul, 1992).

 

In addition, some studies concluded that stock markets could improve corporate governance by alleviating the principal-agent problem between the owners and managers (Jensen and Murphy, 1990). By contrast, other studies pointed out that stock market development could have negative effects by facilitating hostile counter-productive takeovers (Vishny, 1990). Moreover, some argue that takeover threats could hassle managers that discourage long-term investment, and therefore lead to inefficient allocation of resources (Singh and Weiss, 1998). Furthermore, some assert that stock markets, by providing profit incentives, are more effective than banks in information acquisition and dissemination and therefore could enhance quality of investment and thus stimulate growth (Holmstrom and Tirole, 1994). On the contrary, some others believe that banks are superior to stock markets in that they could monitor firms’ investment and management at a lower cost. They contend that in reality, due to dispersed stock ownership, individual investors are relatively small and they neither have the ability nor the incentives to acquire the costly yet necessary information for achieving efficient resource allocation (Bhide, 1993; Singh, 1993).

 

Contrary to traditional view, there are evidences that support the hypothesis that there exist long-run correlation between stock market development and economic growth. But in literature the testing of this hypothesis is rare for developing countries. However, Pardy (1992) in his seminal work has argued that in less developed countries capital markets are able to mobilize domestic savings and allocate funds more efficiently. Spears (1991) reported that in the early stages of development, financial intermediation induced economic growth. Demirguc-Kunt (1994) has supported the view that stock markets promote economic growth.

 

A number of subsequent studies adopted the growth regression framework in which the average growth rate in per capita output across countries is regressed on a set of variables controlling for initial conditions and country characteristics as well as measures of financial market development (King and Levine, 1993a). The study further analyzes the relationship between financial development and real GDP per capita growth, the rate of physical capital accumulation, and increases in efficiency over the period from 1960-89. The study measured the financial development by using the financial depth ratio (ratio of liquid liabilities to GDP), the level of banking, the ratio of credit issued to non-financial private firms to total credit and the ratio of credit issued to private firms to GDP. The study revealed that higher levels of financial development are positively associated with faster rates of economic growth and that the level of financial development is a good indicator of future growth prospects.

 

Robert Barro (1990) reported that in the case of US, stock market variables and stock returns, can largely explain the subsequent aggregate investments. On the contrary, Morck et al (1990) suggested that in the US, the stock market on an aggregate level is not much of a predictor of future investment. Meanwhile, a study by Galeotti and Schiantarelli (1994), based on quarterly aggregate data from the non-financial corporate sector in the US, revealed that investment decisions are significantly affected by stock price fluctuations, regardless whether the variation is due to fads or due to changes in fundamentals. On the other hand, firm- level studies typically showed that there is a very limited effect of the stock market on investment (Abel and Blanchard, 1986; Morck, Shleifer, and Vishny, 1990; Blanchard, Rhee, and Summers, 1993).

 

Table: 2. 4

Review of Empirical Works from 1992 to 1993

 

Study

Area

Major Findings

Saint-Paul (1992)

Financial markets and economic development.

Stock markets have additional growth effect.

Pardy (1992)

Institutional reform in emerging securities markets.

 

In less develops countries the capial maket are able to mobilize domestic savings.

King and Levene (1993)

Finance and growth

Rate of physical capital accumulation has increased in efficiency over the period from 1960 to 1989.

Atje, and Jovanovic, (1993)

Stock market and development

Significant correlation between the stock markets and economic growth.

Pagano (1993)

 

Financial market and growth.

Financial growth can affect the rate of economic growth by altering productivity growth and the efficiency of capital.

Bhide (1993)

The hidden cost of stock market liquidity.

Highly liquid market may reduce the shareholders incentives to monitor managers.

 

Atje and Jovanovic (1993) concluded that there is a large effect of stock markets on economic growth but no relationship for bank lending on economic growth. Alternatively, Harris (1997) argued that the Atje and Jovanovic results are not supported by empirical results. Harris analyzed data for forty-nine countries over the period from 1980-91 for the growth in GDP per unit of effective labor, investment as a percent of GDP, the growth of total employed labor and the total value of shares traded on the stock market as a percent of GDP. The study reported that the level of stock market activity has little explanatory power in the sample of developing countries and weak explanatory power for the sample of developed countries. The study of Stiglitz (1994) provided the evidence that when the stock prices is determined by publicly available information then it help investors make better investment decisions. Better investment decisions by investors means better allocation of funds among corporations and, as a result, a higher rate of economic growth. In efficient capital markets prices already reflect all available information, and this reduces the need for expensive and painstaking efforts to obtain additional information.

Table: 2. 5

An overview of empirical work on 1995 AD

 

Study

Area

Major Findings

Bencivenga, Smith,and Starr (1995)

Transactions costs, technological choice and endogenous growth.

Theoretical predications on strong connections between stock market liquidity and fast growth.

Bencivenga et al. (1995)

Transactions costs, technological choice and endogenous growth

Enhanced stock market liquidity reduces the disincentives for investing in long duration and higher return projects since investors can easily sell their stake in the project.

Longin and Solnik (1995)

 

Is the correlation in international equity returns constant: 1960-1990?

By applying sophisticated techniques they found evidence of significant linkages between the stock markets around the world.

 

Hamao et al. (1990), Koch and Koch (1991), Roll (1992), Longin and Solnik (1995), used more sophisticated econometric techniques to measure cross-country correlations, and found evidence of significant linkages between stock markets around the world. Some other studies focused on the evolution of linkages of emerging capital markets. Studies such as Harvey (1995), but particularly Bekaert and Harvey (1995), examined one period returns and the conditional means and variances of one period returns by examining a one factor asset pricing model. The study concluded that the expected returns in a country are affected by their covariance with country’ returns. The study further concluded that if the market was perfectly integrated then only covariance counted, while if the market was completely segmented then the variance was the relevant measure of market risk. Bekaert and Harvey (1995) used a conditional regime-switching model to account for periods when national markets were segmented from world capital markets and when they became integrated later in the sample.

 

 

Table: 2. 6

Review of Empirical Work for 1996 AD

 

Study

Region

Major Findings

Demetriades and Hussein (1996)

Does financial development cause economic growth?

There is bi-directionality and reverse causality between financial development and economic development.

 

Diamond (1996)

Credit intermediation delegated monitoring: a simple example, Federal Reserve Bank of Richmond

Financial intermediaries encourage highly productivity firms reducing informational asymmetries and costs.

 

Levine and Zervos (1996)

 

Stock market development and long-run growth.

Equity market activity is positively correlated with real activity measures.

Benchivenga, Smith and Starr (1996)

 

Equity markets, transaction costs and capital accumulation.

Positive role of liquidity provided by stock exchanges on real asset investments.

 

There are not much empirical research investigating causal relationships between stock exchanges and economic growth. One study worth mentioning here belongs to Levine and Zervos (1996). The study applied regression analysis to the data compiled from 41 countries for the years 1976 through 1993 to see the relationships between financial deepening and economic growth. One of the financial deepening indicators used in the analysis was the level of development of stock exchange measured by a composite index, liquidity and diversification indicators. Economic growth indicator selected, on the other hand, was the real growth rate in per capita GDP. Levine and Zervos reported a very strong positive correlation between stock market development and economic growth. The most interesting aspect of this study was the decrease in the statistical significance of other financial deepening variables after stock market development index was included in regression equation. The study concluded with the proof that stock market development is more influential than other financial deepening indicators on the growth of the economy.

 

Traditional growth theorists believed that there is no correlation between stock market development and economic growth because of the presence of level effect not the rate effect. Singh (1997) contended that stock markets are not necessary institutions for achieving high levels of economic development. The study focused on the rapid growth of stock markets in the liberalization process in developing countries over the 1980s and 1990s and argued that financial liberalization (making the financial system more fragile) is not likely to enhance long-term growth. Singh and Weis (1999) viewed stock market as a agent that harm economic development due to their susceptibility to market failure, which is often manifest in the volatile nature of stock markets in many developing countries. The traditional assessment model of stock prices and the wealth effect provided hypothetical explanation for stock prices to be proceeded as an indicator of output (Comincioli, 1996). According to wealth effect, however, changes in stock prices cause the variation in the real economy.

 

Although empirical tests of the relationship between financial development and economic development are not consistent, the bulk of the evidence supports a relationship between financial development and economic development. Demetriades and Hussein (1996) found the evidence of both bi-directionality and reverse causality by using unit root tests, co-integration tests and vector auto-regression tests of causality. The study concluded that financial development causes economic growth, economic growth causes financial system development, and in some cases, the causality is in both directions. As independent variables, the study has used the ratio of bank deposit liabilities to nominal GDP and the ratio of bank claims on the private sector to nominal GDP. The dependent variable is real GDP per capita in local currency terms. Rajan and Zingales (1998) predicted the average annual real growth of value added in an industry in the United Stated over the period from 1980-90. As predictor variables the study used the proportion of investments funded with external financing and the ratio of capital spending to net property, plant, and equipment. Industries were further divided into young and old companies. This process helped them to differentiate industries that were more or less dependent on external financing. The study wanted to test if financially dependent industries perform better in countries that have more developed financial sectors. As measures of financial development in each of forty-one countries. The study used the ratio of domestic credit plus stock market capitalization to GDP, the ratio of domestic credit to the private sector relative to GDP, and an index of accounting transparency. They study revealed that the financial development facilitates economic development by providing cheaper funds to growing industries.

 

 

 

Table: 2. 7

Review of Empirical Works from 1997 to 1999 AD

 

Study

Area

Major Findings

Harris (1997)

Stock markets and development

Level of stock market activity has little explanatory power in the developing country sample and weak explanatory power for the developed country sample.

Singh (1997) and Weis (1999)

Financial liberalization, stock markets and economic development.

Stock market is a agent that harm economic development due to their susceptibility to market failure.

Raguraman and Zingales (1998)

Financial dependence and growth.

Financial developmet facilitates economic development  by providing cheaper funds to growing industries.

Levine and Zervos (1998)

Stock exchanges, banks and economic growth.

Strong and statistically significant relationship between the stock and GDP.

Luitel and Khan (1999)

A quantitative reassessment of the finance-growth nexus.

Financial development is very supportive to economic development.

 

The development of endogenous growth theory in recent years has offered the opportunity to define and explain the link between financial development and economic growth. The study of Pagano (1993) and Levine (1997) concluded that the financial development could affect the rate of economic growth by altering productivity growth and the efficiency of capital. It also affects the accumulation of capital through its impact on the saving rate or by altering the proportion of saving.

 

Benchivenga et al (1996) emphasized that there is positive role of liquidity provided by stock exchanges on the size of new real asset investments through common stock financing. Investors are more easily persuaded to invest in common stocks, when there is little doubt on their marketability in stock exchanges. Some contrary opinions do exist regarding the impact of liquidity on the volume of savings, arguing that the desire for a higher level of liquidity works against propensity to save (Benchivenga and Smith, 1991), (Japelli and Pagano 1994), such arguments were not well supported by empirical evidence. The second important contribution of stock exchanges to economic growth is through global risk diversification opportunities. Saint-Paul (1992), Deveraux and Smith (1994) and Obstfeld (1994) argue quite reasonably that opportunities for risk reduction through global diversification make high-risk high-return domestic and international projects viable and consequently, allocate savings between investment opportunities more efficiently. Whether global diversification might reduce the rate of domestic savings (Deveraux & Smith 1994) seemed to be a weak argument, as it is not convincingly evidenced.

 

Levine and Zervos (1998) analyzed by using stock market liquidity (turnover of shares and value), size (market capitalization), volatility (twelve month rolling standard deviation), integration with world markets (CAPM and APT intercept terms), and bank credit for the private (bank credit to the private sector to GDP) as predictors of economic growth, capital accumulation, improvement in productivity, and savings growth rates for forty-seven countries from 1976-93. The study reveals a positive relationship between stock market and bank development and economic growth, capital accumulation, and productivity growth. The authors conclude that stock markets provide an easy means to trade the ownership of productive assets, which facilitates resource allocation, which, in turn, facilitates capital formation, which leads to faster economic growth.

           

In the framework of the new growth theory, surprisingly few empirical studies of the relation between stock market and economic growth are available. The one important study mentioned earlier is one by Levine and Zervos (1998) who are among the first to ask whether stock markets are merely burgeoning casinos or a key to economic growth and to examine this issue empirically, finding a positive and significant correlation between stock market development and long run growth. The work of Luintel and Khan (1999), among others, is supportive of this view.

 

2. 1. 3 Review of Literature during 2000

 

Empirical work done in the past two decades mostly focused on the role of financial development in stimulating economic growth, without taking into account of the stock market development. Evolution of stock market has impact on the operation of banking institutions and hence, on economic promotion. This means that stock market is becoming more crucial, especially in a number of emerging markets and their role should not be ignored (Khan and Senhadji, 2000).

 

Beck et al (2000) analyzed the relationship between financial development and economic growth, total factor productivity growth, physical capital accumulation rates

and private saving rates. The study reported that financial intermediaries and major positive impact on total factor productivity and economic growth, but lower long-term impact on economic growth and growth of the Faktorproduktivit & # xE4; T.

 

Wurgler (2000) analyzed the relationship between financial markets and capital allocation in sixty-five countries from 1963-95. The study revealed that countries with more developed financial markets shift capital to growing industries and away from declining industries. The efficiency of the financial system is inversely related to government ownership in the economy and directly related to information availability for firms and legal protections for minority stockholders.

 

Table: 2. 8

Review of Empirical Work from 2000 to 2004 AD

Study

Area

Major Findings

Beck, Levene and Loayza (2000)

Finance and sources of growth.

There is a large positive effect of financial intermediaries and total factor productivity growth.

Wurgler (2000)

Financial market and allocation of capital.

The efficiency of financial system is inversely related to information availability for firms and legal protections for minority stockholder.

Arestis et al. (2001)

Financial development and economic growth.

Both stock market and bank may be able to help in economic development.

Bell and Rausseau (2001)

A case of finance lend industrialization

Financial development in India has instrumental role for promoting economic performance.

 

Mishkin (2001) and Caporale et al (2004)

Financing, savings, capital and risk.

Financing productive projects mobilize domestic savings, allocate capital and diversify the risk, facilitate exchange of goods and services.

 

 

Tuncer and Alovsat (2001) examined stock market-growth nexus and exhibited positive casual correlation between stock market development and economic activities. Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth. The study of Phylaktis and Ravazzolo (2001) measured financial linkages by analyzing the covariance of excess returns on national stock markets of emerging economies. A major advantage of this framework is that by examining the co-movement of future returns aggregated over a long horizon instead of the co-movement of one period expected returns one can detect small but persistent movements in expected returns and more accurately measure the degree of financial integration than one period stock return regression models.

 

The study of (Arestis, Demetriades and Luintel, 2001) found that in countries like Germany, stock market volatility has a significant and negative impact on growth. Another point worthy of note is that studies based on a cross-country framework in general have omitted China due to lack of data. Needless to say that given the increasing role of China in the world economy, understanding China is important in its own right. The study used a vector autoregressive model to study the relationship between stock market development measures and economic growth for developed economies, controlling for the banking sector development. The study finds that the stock market and economic growth both may be able to promote growth, with the impact of the banking system being stronger. With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau and Wachtel, 2000; Beck and Levine, 2003).

 

Mishkin (2001) and Caporale et al (2004) provided the evidence that an organized and managed stock market stimulate investment opportunities by recognizing and financing productive projects that lead to economic activity, mobilize domestic savings, allocate capital proficiency, help to diversify risks, and facilitate exchange of goods and services. Undoubtedly, stock markets are expected to increase economic growth by increasing the liquidity of financial assets, make global and domestic risk diversification possible, promote wiser investment decisions, and influence corporate governance, that is, solving institutional problems by increasing shareholders’ interest value (Vector, 2005).

 

Bell and Rousseau (2001) evaluated the relationship between individual macroeconomic indicators and measures of financial development in India and revealed that the financial sector has been instrumental in promoting economic performance. Nourzad (2002) analyzed the effect of financial development on productive efficiency using eight measures of financial development for countries at different stages of economic development. The study analyzed three sets of panels of data: annual data for twenty-nine countries from 1966-90, annual data for eighteen countries from 1970-90, and five year average data for twenty-eight countries from 1970-90. The author finds that productive efficiency is greater in countries that have more developed financial sectors.

 

Table: 2. 9

An overview of empirical works, 2005-2007 AD

 

Study

Area

Major Findings

Shrestha (2005)

Stock Market and Economic Development.

Gross Domestic Product influence stock market.

Vinhas de Souza (2005)

 

Financial liberalization and business cycles: The experience of the new EU member states.

Capital market reform programs, government approved new laws are regulatory framework for capital market flourish.

Siliver and Duong (2006)

Role of stock market for real economic activity: evidence for Europe.

Stock market is a RE content of real economic growth.

Yartey and Adjasi (2007)

 

Stock market development in Sub-Saharan Africa: Critical issues and challenges

African stock market facing challenge of integration and need better technical and institutional development to address the problem of low liquidity.

 

Efficient stock markets provided guidelines to keep appropriate monetary policy through the issuance and repurchase of government securities in the liquid market, which is an important step towards financial liberalization. Similarly, well-organized and active stock markets could modify the pattern of demand for money, and would help create liquidity that eventually enhances economic growth (Caporale et al, 2004). Similarly, Siliverstovs and Duong (2006) revealed that the accounting for expectations has represented by the economic sentiment indicator in which stock market has certain predictive content for the real economic activity.

 

Paudel (2005) acknowledged that stock markets, due to their liquidity, enable firms to attain much needed capital quickly, hence facilitating capital allocation, investment and growth. Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle-income economies. Bahadur and Neupane (2006) concluded that stock markets fluctuations helps in the prediction of the future growth of an economy.

 

 

2. 1. 4 Concluding Remarks

 

From the above, it may be seen that the effect of capital markets on economic growth has been a controversial subject. Some studies indicated the statistically significant effect of stock market development on economic growth while others did not. Similarly, some reported positive impact of stock liquidity on economic growth while some did not. In order to validate one view or the other in Nepalese context, no study has been so far conducted by using the recent data by considering Deminigue-Kunt and Levene’s stock market development index. This study therefore tests the above hypothesis concerning stock market development and economic growth in undeveloped country, Nepal.

 

 

 

Chapter 3: Research Methodology

 

3. 1 Research Design

 

For the analysis of relationship between the stock market development and economic growth descriptive, co-relational and time series research design will be employed. For the purpose of conceptualization and description, the descriptive research design is going to be used. For the analysis purpose the study covers the time period of ten years. This study will be made on a macro level so it consists of all the sectors including commercial banks, manufacturing and processing organization, hotel sectors, trading, insurance, finance companies and, development banks and so on.

 

3. 2 Nature and Sources of Data

 

This study has both fundamental and databases. Most data on economic growth and stock market development has collected annual reports and official organization. The information is completed by the Ministry of Finance, Department of Industry, Commerce and Supplies, Government of Nepal, Economic Survey, the quarterly economic bülletää n Nepal Rastra Bank (NRB) National Planning Commission and the Security Committee of the Council of Nepal (Sebon) published by the World Bank published a report be taken into account.

 

A field survey based on questionnaire and interview will also be conducted to collect opinions of different respondents in three groups. The respondents selected for the survey will be stock investors, general student and public who have not invested in shares to obtain the information in respect of economic performance and stock market development.

 

3. 3 Selection of Enterprises

 

The study is related to aggregate values so aggregate values of economy that is determinants of macroeconomic indicators and aggregate value of market activities that is determinants of stock market developments are going to be selected.

 

3rd 4 Analytical Methods

 

Analysis is the systematic and careful examination of available facts so that certain conclusions can be drawn from it. The major part of the study is based on the testing of association of stock market and economic growth.

 

3. 4. 1 Econometric Model

 

This study is heavily based on Levine and Zervos’s study on stock market development and long run growth. However, their study is based on cross-country regression, but this study considers time series analysis and single equation regression applied to the collected data.

 

Study will determine the casual relation between stock market development and economic growth then determine how they evolve over time and finally seek the relationship between the stock market development and its economic performance. Levine and Zervos (1996) suggested the following equation to evaluate whether there is any relationship between the stock market development and long run economic growth.

 

GDPt = aXt + bSTOCKt + µt                                                                                    (1)

 

Where GDP Growtht is the Gross Domestic Product growth rate and Xt is a set of control variables that is associated with GDP. These variables include government expenditure (EXPN), Public Investment (INV), public development aid (AID), foreign direct investment (FDI). In the same way STOCKt represents stock market development index. It includes market capitalization ratio (Mcap), liquidity ratio (Liquidt) and concentration ratio (Conct). A and B are unknown parameters to be estimated and Mt is an error term. We can consider the following equations in details.

 

GDPt = a1 Xt + b1 Mcapt + b2 Liquidt + b3 Conct + µt                                                               (2)

 

Government expenditure is selected as control variables because in underdeveloped country, government plays key role in economic growth for driving the different productive activities. Thus it can impact positively as well as negatively on economic growth. Public investment is selected as a control variable because if the public investment policy is directed correctly (for instance towards infrastructures development), it can impact significantly on economic growth, since public investment can target health, education, etc. , which all contribute to increase total factor productivity. Public development aid is selected because in developing countries savings is inadequate so development aid is an ‘oxygen pipe’ for nation’s development. Foreign direct investment is taken because it measures the private investment as domestic investment is very low as compared to it so it is ignored here.

 

The variable levels of liquidity, turnover ratio, measured as the total value of shares traded divided by market capitalization (with a high turnover, then an accelerated rge liquidity). Liquidity allows investors to easily buy and sell securities. As Levine and Zervos (1,996) Put it could affect the stock markets, economic activity, through its liquidity, as investors do not want to manage your storage & # XFC, about to give up some time. The market value ratio, which divides the value of listed shares of GDP, are indicators for the stock market. This ratio measures the amount of the stock market, and the ability to mobilize capital to help the diversity of risk. Four-firm concentration ratio is concentration ratio, dividing the market capitalization of the four largest stock measured by the total value of shares. If only a few companies dominate the market, they can manipulate prices. Such a high degree of concentration is not desirable. Countries in the market is highly concentrated in markets that are underdeveloped. This is considered to be negatively correlated with market concentration and market size and liquidity.

 

3. 4. 2 Correlation Analysis

 

Correlation analysis is necessary in order to find out whether the selected variables in time series have any relation or not. If there is no correlation there would be no causality so this test is necessary.

 

A mathematical formula for measuring the correlation developed by Pearson is as follows.

 

(3)

 

If the correlation coefficient r, XT and YT are two variables to calculate the correlation. Correlation is a measure of a relationship between two or more variables. The measurement scale ranges from -1. 00-1. 00th A value of -1. 00 represents a perfect negative correlation, while the value of +1. 00 represents a perfect positive correlation. A value of 0 00, or a lack of correlation is zero.

 

3. 4. 3 Time Series Analysis of the Data

           

For the data analysis purpose the following time series analysis is made. They are as follows.

 

3rd 4th 3rd Unit root test:

 

According to Nelson and Plosser (1982), Chowdhury (1994) there exists unit roots in most macroeconomic time series.   While dealings with time series, it is necessary to analyze whether the series are stationary or not. Since regression of non-stationary series on other non-stationary series leads to what is known is spurious regression causing inconsistency of parameter estimate (Engle and Yoo, 1987). The hypothesis behind is that random shocks in economy have long lasting effects (Engle & Granger, 1987). The most popular of these tests are the Augmented Dickey-Fuller (ADF) test and the Phillips-Perron (PP) tests. ADF test will be considered for this study because ADF tests use a parametric autoregressive structure to capture serial correlation.

 

3. 4. 3. 2 Co-integration Test

 

The finding that many macro time series may contain a unit root has spurred the development of the theory of non-stationary time series analysis. Engle and Granger (1987) pointed out that a linear combination of two or more non-stationary series may be stationary. If such a stationary linear combination exists, the non-stationary time series are said to be co-integrated. The stationary linear combination is called the co-integrating equation and may be interpreted as a long-run equilibrium relationship among the variables. The purpose of the co-integration test is to determine whether a group of non-stationary series is co-integrated or not. Eviews5 statistical software implements VAR-based co-integration tests using the methodology developed in Johansen (1991, 1995a).

 

There are two different methods for testing for co-integration, Engle & Granger (1987) and Johansen (1988). Jung and Seldon (1995) state that the Johansen co-integration test is more valid as there is no need of prior knowledge of the co-integration vectors, in cases when they are unknown. As this study does not have the co-integration vectors it is better to use the Johansen (1988) test. The Johansen methodology utilizes Vector Auto Regression (VAR) to test the co-integration. The Johansen (1988) method of testing for the existence of co-integrating relationships has become standard in the econometrics literature because of its superiority over other alternatives.

 

3. 4. 3. 3 Granger Causality between Economic Growth and Stock Market Development

 

Measuring the correlation (similarities in strength and direction between two graphs) between variables such as GDP and STOCK would according to Granger (1969) not be enough to construct a complete understanding about the relationship between two time series. The reason is that some correlations may be spurious and not useful, as there might be a third variable that cannot be accounted for. For example there is a correlation between teacher’s salaries in the UK and the consumption of alcohol in the UK. Another example is that ice cream sales are correlated to shark attacks on swimmers (Lethen, 1996). In both examples it would be highly unlikely that one causes the other but that there exists other hidden variables affecting both. There is a correlation but no causal connection.

 

By using the Granger causality approach with the question if variable X (in a time series), causes variable Y (in another time series), a researcher wants to see how the value of the existing Y can be explained by past values of Y. And then by adding lagged values of X add to explanation of the relationship (Eviews 5. 0 statistical software)

 

This does in practice imply that if you find a variable that is Granger causing another variable in a certain direction or both, manipulation of one would affect the other.   To reduce spurious results the process of finding Granger causality also involves finding out other relations between the time series and such relations include looking at correlation and co-integration (Sahlin and Sjogren, 2008). So this study is not only looking at the correlation, co-integration and causality but also looking at a further developed relationship between the time series. This is combined to produce an answer to if there is a relationship between the variables. Hence, in this study the word relationship stated by statistical software is used as a generic term for the combined correlation, co-integration and causality time series. For the calculation purpose the following equations have to be estimated.

 

3rd 4th 4th 4 Further statistical tools is considered

 

Our presentation and analysis of data from other statistical tools. You are mean, median, standard deviation, maximum and minimum, T-test, F-test and the standard error of estimate (see).

 

 

 

Chapter 4: Concluding the research proposal

 

There are many studies that have examined the relationship between growth and stock markets using either cross country or panel methods. However their empirical approach typically suffers from serious econometric weakness. Traditional growth theorists believed that there is no correlation between stock market development and economic growth. Singh (1997) argues that stock markets are not necessary institutions for achieving high levels of economic development. Some recent studies have stated that stock markets play an important role in allocation of capital to corporate sector that in turn stimulate real economic activity. Studies of Caporale (2004), Vector (2005), Mishkin (2001) and few other studies too state that an organized and managed stock market stimulates economic activities. Most of these studies have reported positive effects of stock on economic growth. One group of study argues that stock markets do not help in economic development of a nation while the other group argues that it help in economic development.

 

With this contrast view, this study attempts to find possible connection between stock market development and economic growth with reference to Nepal. The variables selected for the study are Gross Domestic Product (GDP), Government Investment (INV), Government Expenditure (EXPN), Foreign Aid (AID), Foreign Direct Investment (FDI), Market Capitalization Ratio (MCAP), Concentration Ratio (CONC) and Liquidity (LIQDT).

 

 

 

 

Abel, Andrew B. and Blanchard, Olivier J. (March 1986), “The Present Value of Profits and Cyclical Movements in Investment. ” Econometrica, Vol. 54, No. 2, pp. 249-273.

 

Adjasi, Charles K. D. and Nicholas B. Biekpe (2005), “Stock Market Development and Economic Growth: The Case of Selected African Countries. ”  Working Paper, African Development Bank.

 

Arestis, Philip; Demetriades, Panicos O; and Luintel, Kul B. (2001), “Financial Development and Economics Growth: The Role of Stock Markets. ” Journal of Money, Credit, and Banking, Vol. 33, No. 1, pp. 16-41.

 

Atje, Raymond and Jovanovic, Boyan (April 1993), “Stock Markets and Development. ” European Economic Review, Vol. 37 No. 2/3, pp. 632-40.

 

Bagehot, Walter (1873), A Description of Money Market with Currency Monopoly, Homewood, Lombard Street, 1962 Edition.

 

Barro, Robert (1990), “The Stock Market and Investment. ” Review of Financial Studies, Vol. 3, No. 1, pp. 115-131.

 

Bastola, P. (2003), Impact of Stock Market in Development, unpublished Masters Dissertation, Faculty of Management, Tribhuvan University.

 

Beck, Thorsten, Ross Levine and Norman Loayza (2000), “Finance and the Sources of Growth. ” Journal of Financial Economics, Vol. 58, pp. 261-300.

 

Beck, T. and R. Levine (2003), “Stock Markets, Banks, and Growth: Panel Evidence. ” Journal of Banking and Finance.

 

Bekaert, G. and C. R. Harvey (1995), “Time-Varying world market integration. ” Journal of Finance, Vol. 50, pp. 403-444.

 

Bell C. and P. L. Rousseau (2001), “Post-Independence in India: A Case of Finance Lend Industrialization. ” Journal of Development Economics Vol. 65, pp. 153-175.

 

Bencivenga, V. R. and Smith B. (1991), “Financial Intermediation and Endogenous Growth. ” Review of Economic Studies, Vol. 58, pp. 195-209.

 

Bencivenga, V. R. ; Smith, B. and Starr, R. M. (1996), “Equity Markets, Transaction Costs, and Capital Accumulation: An Illustration. ” The World Bank Economic Review, Vol. 10 No. 2, pp. 241-265.

 

Bernanke, B. and M. Gertler (1989), “Agency Costs, Net Worth, and Business Fluctuation. ” American Economic Review, Vol. 79, pp. 14-31.

 

Bhide, Amar (August 1993), “The Hidden Costs of Stock Market Liquidity,” Journal of Financial Economics, Vol. 34, No. 2, pp. 31-51.

 

Blanchard, Olivier, Rhee, Changyong, and Summers, Lawrence (1993), “The Stock Market, Profit, and Investment. ” Quarterly Journal of Economics, Vol. 108, pp. 115-36.

 

Capora


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Infrastructure development is crucial in every country that wants to escalate forward in their economic status. However, there are those that cannot afford because of the lack of resources. The World Bank, established in 1994, is such a vital spring in international business and finance that has been assisting countries all over the world.
It is not a bank, as the name suggests, but it is a global organization that is made up of two special progressive institutions. This international business and finance source consists of 184 nations together with the International Bank for Reconstruction & Development (IBRD) and International Development Association (IAD).
Each has a specific responsibility supportive of its mission to alleviate poverty and lifestyle improvements. The International Bank for Reconstruction & Development (IBRD) concentrates on middle income and creditworthy poor regions while the International Development Association (IDA) is on the poorest regions in the globe. Both offers low- interest loans and interest- free credit that also provides education, health, communications and other beneficial purposes.
This international business and finance group also has its own affiliates like the International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), International Center for Settlement of Investment Disputes (ICSID). IFC grants advisory services, loans, structured finance, equity and management products that build the private sector in developing countries. MIGA promotes global immediate investment into developing nations to assist economic growth, improve lives and reduce poverty. ICSID imparts facilities for the pacification and mediation of feuds between member countries and investors.
Some of the members of World Bank are Afghanistan, Albania, Barbuda, Belize, Chile, China, Denmark, Dominica, Ecuador, Egypt, Guinea, Germany, Haiti, Hungary, Iceland, Indonesia,. Korea, Kuwait, Jordan, Jamaica, Kenya, Kazakhstan, Libya, Luxembourg, Macedonia, Myanmar, Namibia, Nepal, Pakistan, Panama, Poland, Philippines, Romania, Rwanda, Samoa, Senegal, Thailand, Tanzania, Uganda, Ukraine, Venezuela, Vanuatu, Zambia and Zimbabwe. In the International Bank for Reconstruction and Development, it has a total of 184; 165 for International Development Association; 178 for International Finance Corporation; 167 for Multilateral Investment Guarantee Agency and 143 for International Center for Settlement of Investment Disputes.
Since it is an international business and finance cooperative, the shareholders are represented by a Board of Governors. They gather every once a year at the Annual Meetings to make policies as well as discuss about the International Monetary Fund. Since their convention only happens very seldom, they delegate specific responsibilities to about 24 executive directors who work on- site at the headquarters located in Washington D. C. The biggest depositors are United Kingdom, France, Germany, Japan and United States who are the ones who appoint. At present, the president of World Bank is Paul Wolfowitz who holds a five- year and renewable term. He is accountable for the overall management of the organization and chairs meetings that are called for.


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Many often point to China’s meteoric rise to power but South Korea deserves investor’s attention offering under-rated values and long-term economic stability. Certainly, it will stand to benefit from continued recovery in China, Japan and US. South Korea adopted numerous economic reforms in early 2009, amid the global financial crisis; including greater openness to foreign investment and imports.  

Several key factors pop-out while researching South Korea. For example,

- South Korea growth on track at 7% GDP, 2010

- Total budget deficit 2% of output, it has a $825-billion annual GDP

- High-quality educated and IT wired population of 38-million Internet users. Its per capita income in purchasing power-terms now $28,000 and closing on Japan at $33,000

- Smart economic leadership, early on in global financial crisis it setup $15-billion re-capitalism fund and stabilized its currency arranging $90-billion guarantees with USA, Japan and China then extracted maximum funds with very little debt.

- Early on it used targeted fiscal stimulus to focus heavily on job creation and sustainable business developments. South Korea’s unemployment rate is 3. 6%, Q1 2010.    

South Korean’s challenges include; The South Korean economy’s long term challenges include a rapidly aging population, inflexible labor market, and overdependence on manufacturing exports to drive economic growth. Its labor force stands at about 24. 4 million people. The sector workforce occupation breakdowns include;

Agriculture (7. 2%)

Industry (25%)

Services (68%) 

Further, details show key agricultural products rice, root crops, barley, vegetables, fruit; cattle, pigs, chickens, milk, eggs and fish. Its top industries include electronics, telecommunications, automobile production, chemicals, shipbuilding, and steel.

Perhaps, you’re familiar with Samsung (SSNLF. PK), LG (LGERF. PK), and Hyundai (HYMLF. PK), among other top South Korea corporations.    

Several companies managed to upgrade their technological prowess even as the recession bit. For example, a consortium led by state-run Korea Electric Power Corp (KEP), beat-out the USA, French and Japanese rivals to a $20bn nuclear power contract in the United Arab Emirates. Seoul predicts it will bag $400bn in nuclear reactor sales over the next 20 years.  

Motor-car maker Hyundai has warmed his hands on Corporate Detroit’s campfire. Now the world’s fastest growing car manufacturer in the U.S. market share has increased third 4 of 7 percent to 4 percent in just 12 months. Toyota adds only the problems of its own momentum: this is one of the companies under the $ 1,000 trade-in discount Toyota.

Manufacturing exports overall have come back faster than almost anyone expected. Korean companies are big suppliers of equipment and materials needed for China’s stimulus-fuelled building extravaganza. Its cars, DVD recorders and other electronic goodies are in the right price range to win market share from stingier consumers. Exporters have been helped by their high exposure to emerging markets, which make up 70 per cent of demand for Korean goods.    

Manufacturers have further benefited from a sharp currency realignment that has seen the yen strengthen and, until recently, the won depreciate. “Since the crisis, things have flipped decisively in South Korea’s favor,” says Kwon Goo-hoon, executive director at Goldman Sachs (GS) in Seoul.    

The successes of corporate Korea are being matched by a new diplomatic swagger. Washington’s relations with Japan are rockier than normal because of disagreements over military bases. US-Sino ties are being tested by disputes over arms sales to Taiwan and cyber-security. That leaves South Korea as Washington’s new best friend in the region, a factor that has helped bolster its credentials as this year’s president of the Group of 20.    

South Korea, of course, faces enormous challenges. Its success is too dependent on a clutch of huge conglomerates such as Samsung. These companies still need to prove they are world-class innovators. The service sector is under-developed. The labor market is too inflexible for an economy seeking rapidly to redeploy resources to higher-value industries. Korea’s ride on China’s back could yet prove a liability if its giant neighbor stumbles. It also has one of the world’s most rapidly ageing societies. Unless it can increase productivity, its shrinking labor force holds out the unappetizing prospect of producing Japanese-type growth levels.    

Sure, many of these problems – such as Japan itself – the success of the products. Economy in 1960 was comparable to the per capita income in sub-Saharan Africa is now embracing heels of Great Britain and France. South Korea seeking a sophisticated place for those who undervalued investment opportunities.


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For millions of people, the current state of the economy is a source of concern and fear. Small businesses and large corporations alike have begun implementing aggressive cost-cutting measures in an effort to survive. For event organizers, the economic crisis presents an unsettling challenge. As businesses in every sector take steps to control their spending, casualties on the chopping block include lavish meetings, conferences, and other events.
Over the past year, tax authority Deloitte, AIG, and Wachovia have canceled hundreds of affairs that had been planned for the coming year. AIG alone has cut over 160 conferences. And they are but a microcosm of a widespread trend.
Below, we’ll explore how the economic climate is affecting event planners. I’ll also describe a few ways in which experienced, savvy organizers are coping with the challenge and planning their future success.
The Importance Of Customer Service
It has never been more important to cater to your customers’ needs. Not only does that mean being responsive to their requests, but it can also involve fulfilling a consultant’s role. Remember, the businesses for whom you plan events are looking for solutions. While their objective may be to organize a trade show, conference, or meeting, their true aim is to have a package delivered to them that perfectly suits their preferences. If you can fill that role, lowering your costs in the process, your clients will be more likely to move forward, despite the troubled economy.
Increasing Registration And Attendance
Even as businesses are cutting back, event planners must direct more of their attention toward increasing the number of registrations and attendees at their affairs. Start with advertising channels that won’t require a significant investment. For example, create a system that markets your conferences, meetings, and seminars through an automated email campaign. People often need constant reminders before responding. Sending a number of weekly, personalized emails that encourage attendance will prompt a higher level of response.
Also, keep in mind that you can suggest that your clients take a lower-cost approach to an event rather than simply canceling it. For example, if a large client usually holds their annual conference at a luxurious hotel in another state, recommend that they change the venue to a regional alternative. It’s less expensive and provides your client with a feasible option that makes canceling the affair unnecessary.
Reducing Your Cost Structure
Planners should also be taking cost-cutting measures themselves. That may include negotiating more aggressively with caterers and venue operators. But, it can also involve small changes, such as replacing disposable cups and plates with china, or making handouts available online before a meeting or conference. Also, if you’re organizing a conference that spans several days, consider shortening the sessions. That may allow you to cut the number of days while delivering the majority of the content. By using several strategies to reduce your costs, you can enjoy a substantial aggregate effect.
Moving Forward In Uncertain Times
Your job as a planning professional requires the ability to juggle and manage a myriad of small details. That’s one of the reasons why your clients are depending upon you. However, in a difficult economic environment, you need to expand your value. That means focusing on the level of support you provide your clients, including the development of packages that suit their needs.
Remind them that planning events is still important to their businesses. Top salespeople need to be recognized and rewarded; opportunities to network with customers and leads need to be created; and employee team-building retreats can still yield immense long-lasting value. The savvy event planner who uses this approach in order to increase their registrations while lowering their cost structure will be well-prepared for the softening economy.


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Wendell W Solomons

  

Beijing in 1958, Mao argued that imperialism and all reactionaries are paper tigers.

* * *

 In Moscow, for his part General Secretary Khrushchev detected a tiger armed with nuclear teeth.

* * *

 History has now set aside the outward differences of the statements. To cater for its population today the USA imports every year $1000 billion worth of goods more than it exports. Thus we know how the USA became a magnet for migration. Besides fathering the US President, the Luo tribeâ??s Barack Obama, Sr. is uncle to Kenyaâ??s own PM.

 

Millions of migrants arrived in the USA mostly drawn to a standard of living maintained by dollar bills printed for the Federal Reserve bank and their equivalent created by bookkeeping entries. In this manner we have a paper tiger.

Â

It is said that â??Beauty exists in the eye of the beholder. â? The beauty of the dollar pyramid exists because it is associated with value by the eye. As awareness of this illusion dawned, several nations shifted from the dollar to EU currency including oil-rich monarchies in the Gulf. However, China has earned the largest reserves of dollars and should it suddenly shift its reserves to EU currency that would cause a breakdown in international trading.

 

What has China chosen to do to save itself from this beautiful paper pyramid?

 

China has decided to use the example of their dollars to create an export-import infrastructure. Singapore is no longer enough room service vessels invested in the east-west through the Indian Ocean, such as China, the massive port in southern Sri Lanka. Fiji welcomes Chinese investment in the South Pacific. Australia has been hampered development, but this country is also looking to invest in China to export more Australian minerals to China.

 

 

China – Spared Shock Therapy

 

China signed a free-trade pact with ASEAN. Yet, the most populous nation in ASEAN, Indonesia, finds that its products, ranging from motorcycles to steel, cannot compete with Chinese equivalents.

 

Chinese influence is experienced in Latin America. In Africa, besides buying minerals China leases land to grow food grain for its population.

 

Food grain takes us to the republics of the former Soviet Union. Currently, less than half of Russiaâ??s arable land is cultivated. The picture is similar in Kazakhstan and the Ukraine. That leaves more space for Chinese farming infrastructure.

Â

Yet, China also needs water, timber, petroleum, natural gas and coal. While the US clears a path through Afghanistan for energy pipelines from Central Asia, China has already built its own. China has been setting up saw mills in Siberia which vast region has timber reserves aplenty (at 13 million sq. km it constitutes 77% of Russiaâ??s land area. ) Chinese investment in petroleum, natural gas and coal has been welcomed by top Siberian officials in a situation where several Siberian towns have been deserted through Russians moving for work to large cities like Moscow in Russiaâ??s European sector.

 

Russia and China, however, arises mainly from China, which has been spared the shock

Therapy that was used in information warfare on Russia. The convener of economic hit men for Russia, â??new US friend and partnerâ?? in 1992, was discovered by journalist Anne Williamson to be Larry Summers (of whom later. )  Shock Therapy made many millions of Russians believe that they were individual â??Napoleon Bonapartes. â?? That set off a silent (and sometimes not so silent) war of each-against-the-other.

 

These millions of  â??Napoleonsâ?? had watched US hit men, shadow box and audio-visually demolish the concept of society on Russiaâ??s central TV channels. As UK PM Margaret Thatcher had announced in the 1970s (and therefore proved adequately lethal by 1992): â??Thereâ??s no such thing as society â?? there are only individuals and families. â? In consequence a first ever public debate â??What is the â??Russian ideaâ??â?? arose under President Boris Yeltsin.

 

Vladimir Putin, the next Russian leader, suggested a finance capital agenda behind this, â??They want us to open our doors so that their banks can buy us up. â? In the UK and USA, finance capital holding houses had bought up manufacturing industry. Yet, over the years the finance houses demonstrated their incapability in managing industry staff towards innovation. Anglo-American civilisation is presently lost in the crisis of paper capitalism created by (1) hit-man, bankerâ??s capitalism and (2) hyper-active private media. The tail wags the dog.

Â

These quotations suggest that diversion by media adds to lost productivity:

 

â??To provide its happy people with perpetual fun is now the deepest purpose of Western civilization. â?

â?? Jeremy Seabrook

 

â? The era of manufacturing consent in the era of manufacturing news. Soon media newsrooms will fall, and pretending to start hiring directors instead of journalists. â?

â?? Arundhati Roy

 

Anglo-American holding companies keep seeking to respond to their crisis by bursting overseas to solve the problems created at home.

 

To return to discussing China now, we see that Chinese manufacturing has deeply penetrated not only Vladivostok and Khabarovsk in the Far East but all major Russian population centres. If Russia restores its economic planning functions, then an orderly process of joint ventures will develop the economic potential of Siberia and pave the way for innovative new business as China has already done in winning consumers world-wide.

 

Besides restoring economic planning, Russia must re-address the issue of motivating cadre (that Anglo-American management books struggled for during 1960-1990 but failed. ) Moscow had tried a system of work brigades in the 1970s (notably used by Volvo. ) On the other hand, the system of participative group work pioneered by corporations such as CANON, SONY or TOYOTO will create trust, innovation and job satisfaction more rapidly. Today, face-to-face group collaboration, say for new engineering designs, is possible even over large distances thanks to the Internet and factories providing private electronic communication.

 

 

Why US canâ??t match Chinaâ??s economic planning

 

Today US fears China as Russiaâ??s partner in Siberia.

 

Why?

 

US consumers depend on manufactures from China while at the same time the â??New York Timesâ?? has been calling China a superpower.

 

President Obama mentioned China twice in his January 2010 State of the Union address. His address still continued his â??empowermentâ?? election slogan that paralleled the famous Mahatma Gandhi quote, â??We must be the change we wish to see in the world. â?

 

Yet, President Obama is trapped in the coils of Larry Summers, the thick Wall Street python who heads the White House Economic Council (though a nephew of economics text-book writer Paul Samuelson, his boorishness and villainy brought in academic staff to push him out of the prestige seat of Harvard Universityâ??s head that had been bought for him by Wall Street. ) This heavyweight

hit man is now in the process of returning Obama to media-minted crises overseas.

 

As Michael Parenti mentions â??

 

â??With each newly minted crisis, US leaders roll out the same time-tested scenario. They start demonizing a foreign leader . . . charging them with being communistic or otherwise dictatorial, dangerously aggressive, power hungry, genocidal, given to terrorism or drug trafficking, ready to deny us access to vital resources, harboring weapons of mass destruction, or just inexplicably â??anti-Americanâ? and â??anti-West. â? Lacking any information to the contrary, the frightened public . . . are swept along. â?

 

The Anglo-American bankersâ?? shadowy cross-Atlantic war against the EU and its common currency was toned down (NY’s George Soros ceased talking down the euro in 2001,) but China and Iran are now being hauled up for attack by network media.

 

Goes so far as military attacks on Iran knows U. S. Sunburn missiles are flying with the Air Force met two times the sound speed. Therefore, the air battle against raging inferno of oil tankers in the Gulf, through which 40% of the world? S was going. Sun rattled the U.S. military government elections in China’s media strategy is bolstered by cooperation with Russia. China and Russia are partners in the Shanghai Cooperation Organization.

 

Even if 300 million US citizens lose access to Chinaâ??s products, we live in a 7,000 million population world. To meet demand for manufactured goods from the world, more activity will clearly be scheduled with next-door Siberia for several basic resources that China’s will need.

 

Singapore offered incentives to mothers who avail themselves of higher education because children would benefit from more knowledge and skills. For the part of China, that nation uses its state sector to send investment into chosen targets and therefore enrollment in higher education institutions increased by 65% as compared with 1998 â?? China responded with a full basket.

 

Clean energy has been discussed in the world for several decades. For the part of China, it has now become the worldâ??s leading manufacturer of solar cells. China is also making great strides in the use of other alternative sources of energy, including wind energy.

 

With China expanding its manufacturing capacity, Russia can at first hand earn revenue on timber, water, petroleum, natural gas and coal.

 

But Larry Summers a python coiled around him, Roosevelt, a President Obama has been very little progress in the use of the public sector was the President of the Great Depression to the 1930s BEW & # xE4; valid. World Banka? S Globalia planners in Washington, for its part in developing the design to destabilize many countries (Summers occupied the post of Chief Economist.)

 

As opposed to Washington DC offices, Russia possesses experience, manuals and teachers to utilise the GOSPLAN planning techniques that Russia had itself shared in the 1950s with China.

 

In this connection we also have an important historic precedent to remember.

 

The destruction of Kiev during the 1237â? Tartar hordes in 1240 was no less catastrophic than the US-Shock Therapy. Russia has risen thanks to penetrate the culture of Christian monasteries reaching from the Tatars in Siberia could not. Siberian monasteries helped to mobilize people. The Russian movement can then be returned to the West and Moscow to consolidate. It has brought the northern capital of Kiev, Moscow and it was the Czar Ivan IV (Terrible / Terrible), who eventually exceeded the Astrakhan Tatars in the Battle of the 1556th

 

In summary

 

China will inevitably use its huge foreign exchange reserves in Asia and the world. Until consumer goods manufacturing arises in Russia from a knowledge-intensive base as President Dmitry Medvedev advises, Siberia can serve China as a source for water, timber and energy. This would happen during five years subject to three factors:

 

1. Russia must restore economic planning functions for participation with China. GOSPLAN will help in the onward development of Siberia but will also help provide a social safety net in Russia.

 

2nd Russia needs of its people against attacks on the media disinformation, as China was to protect it. At the World Social Forum (WSF) in Brazil in January 2010, several speakers suggested a theme such as for school? Eliminate misinformation. â? Key resource persons have knowledge of the WSF India, Arundhati Roy.

 

3. Besides a return to economic planning â?? after half a century the management issue of motivating people towards working in cooperation must be solved again in Russia as it did upto the era of the launch of the worldâ??s first satellites.

 

Â

On the Internet, for further details see these two reports â??

 

1st â? Petrograd connecting, planning and statecraftâ?

 

2. â??Saturdayâ??s Miracleâ?


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In today’s economic challenge, a true international online presence is not an option!

In light of all the catastrophic economy-related news which “The Media” enjoyed so much sharing with us over the past few weeks, I am asking the following question: “Have you noticed in times of recession how some individuals are thriving in abundance. . . and on the same token, how some others always experience financial distress in times of a flourishing economy?” I decided to write this short article as I just received the most absurd feedback from a potential customer interested in the Multilingual Search Engine Optimization services offered by MSEO. com. Basically, I was speaking to a lady located in the New York area who was interested in promoting her website on foreign search engines in 5 languages (Japanese, French, Spanish, German and Russian).  Although she obviously understood that her website would greatly benefit from such international presence, she was hesitant to move forward “due to the recession” according to her wording, which almost sounded like a mantra (she only repeated  the word “recession” 8 times during a 15 minute conversation)!! If she was considering investing in real estate or on the stock market, I would probably understand such a cautious approach (my example might not be the most pertinent since fortunes are always built from the real estate & stock market fields in times of recession/depression!). Anyway, in her case, we are talking about developing a true international online presence by promoting a website on foreign search engines! We are speaking about having her website being found on the Japanese Google when a Japanese user types her keywords in Japanese (using Japanese characters) or, again, when a Russian user types the same keywords in Russian on Yandex (the leading Russian search engine)! Back to my story: As the lady I was speaking to was trying to justify her indecisive attitude reciting all the economic-horror-stories she had heard, I felt a form of compassion for all “CNN victims”! Anyway, after being bombarded with apocalyptical forecasts for the US (and the world in general!), in return, I offered her my feedback by asking 3 questions:

Developing a true international online presence by promoting a website on foreign search engines is the first step to market diversification. . . “Don’t put all your eggs in one basket” is a popular saying which I believe has its equivalent in all languages! Let’s take the aforementioned example of this US-based business which was considering implementing a multilingual search engine promotion campaign in 5 languages: Japanese would mean interacting with a clientele with a buying power based on the Japanese Yen; German equals Euros; French means Euros of course, but also Swiss Franc, CFA Francs (Africa), Canadian Dollars, Pacific Francs, Moroccan Dirhams, Tunisian & Algerian Dinars etc. ; Spanish “smells” like Euros, but includes multiple currencies from South & Central America, the Caribbean, as well as the US & Canadian Dollars considering the significant Hispanic online population in North America; Russian means Rubles and the Russian online market represents one of the most financially thriving online platform as a stand-alone language. Aside from diversifying your clientele by exposing your website to various economies, reaching globally allows you to develop a presence on geo-targeted markets which might rely heavily on imports regardless of the strength of their currencies. In fact, from Africa to Southeast Asia, there are many countries in financial dire straights which depend economically on imports of goods and services of all kinds! It is often in these micro economies that success stories are still being written! However, it is important to underline the fact that not all markets relying on imports are based on “funky currencies”! Think Arabic and then access Dubai or Abu Dhabi. . . Bahrain or Qatar just to name a few. . . . These are not only the wealthiest markets in the world, but, also, Arabic online gives access to the economical platforms relying the most on imports of all nature (goods /services / technology/ talents etc. ). In spite of their motivation to develop a true international online presence through foreign search engine placement, I deal with many marketers who fear the language barrier resulting from multilingual platforms: “What do I do if I receive e-mails in Chinese? German? Japanese? Arabic? Etc. ”.  Apprehending such situation is really underestimating the English language fluency of international online communities. There are millions of individuals who speak English, but who cannot find your website since over 99% of them conduct their searches on foreign search engines using keywords in their mother tongue. It does not mean that because someone in Germany types your keywords in German on the German Google that such person does not speak English. The same applies for all languages. Again, 99% of all users type keywords in their mother tongue, and this is why it is crucial to have an online presence on major foreign search engines for a true global reach. Once again, increasing your online presence internationally is not about dealing with users in their mother tongue, since most international business is being transacted by individuals accepting English as THE International Language for global communication! Regardless of your marketing budget, International SEO is your first-step-gateway to economic salvation through market diversification! When “the recession knocks at the door”, your business strategy should be adapted accordingly. Think of times when the economy was stronger: maybe reaching multilingual online markets then was regarded as an “eventual” added value to your business. . . maybe not a priority in your scale of marketing consideration. . . something to put on the backburner. The economy has shifted. . . the time has come to go global while staying local. In other terms, you do not need a global presence to develop true international online market shares! Once again, allow me to emphatically reiterate that although an overwhelming percentage of all initial searches are conducted using keywords in the mother tongue of the user on local search engines, do not underestimate the English fluency of your international audience. Think Global. . . Think Multilingual SEO. . . Think International Online Presence. . . Think Multilingual Online Markets. . . and I promise you the trip of your life (without jet lag!)!!

Mathias Levarek, Ph. D. SEO Consultant for http://www. mseo. com


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