A very interesting research paper has been published. This talks about the relationship between the future economic growth, the financial sector and the stock market index returns. They study 18 developed and 18 emerging markets and find that there is a positive and significant relationship between bank stock returns and future economic growth (GDP growth).
And while I do not have any references to hand, I think liberalising and strengthening the financial sector would be the easiest for governments to achieve compared to say for example the pharmaceutical or say the automobile industrial sectors.
The easy bit is from the perspective of good quality people, infrastructure, regulation and laws, removing corruption and making it easier to transact business, etc.
Cole, R.A., Moshirian, F., Wu, Q., Bank stock returns and economic growth, Journal of Banking & Finance (2007), doi: 10.1016/j.jbankfin.2007.07.006
Previous research has established (i) that a country’s financial sector influence future economic growth and (ii) that stock market index returns affect future economic growth. We extend and tie together these two strands of the growth literature by analyzing the relationship between banking industry stock returns and future economic growth. Using dynamic panel techniques to analyze panel data from 18 developed and 18 emerging markets, we find a positive and significant relationship between bank stock returns and future GDP growth that is independent of the previously documented relationship between market index returns and economic growth. We also find that much of the informational content of bank stock returns is captured by country specific and institutional characteristics, such as bank-accounting-disclosure standards, banking crises, enforcement of insider trading law and government ownership of banks.
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