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The missing link: the finance-growth nexus and the Guyanese growth stagnation

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  • Khemraj, Tarron

Abstract

The theory underpinning financial liberalization postulates that unregulated financial markets are growth-augmenting. Guyana has been a model reformer since 1988, implementing market-friendly policies. Growth performance, however, has been subdued. This paper argues that natural entry barriers necessitate an oligopolistic banking structure, which follows a mark-up threshold loan interest rate rule at which business credit is constrained. Empirical validation of the mark-up loan rate comes from a bank excess liquidity preference curve that is horizontal at the high threshold rate. Moreover, the flat curve signifies that non-remunerated excess liquidity and interest paying business loans are perfect substitutes at the threshold loan rate. Once business credit is restricted, banks hold excess liquidity and/or foreign assets. Therefore, the Guyanese economy has evolved from a regime of government financial repression to private oligopoly bank stagnation; hence the missing link connecting finance and growth.

Suggested Citation

  • Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16342
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    6. Stijn Claessens & Luc Laeven, 2005. "Financial Dependence, Banking Sector Competition, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 179-207, March.
    7. Chang, Ha-Joon & Park, Hong-Jae & Yoo, Chul Gyue, 1998. "Interpreting the Korean Crisis: Financial Liberalisation, Industrial Policy and Corporate Governance," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 22(6), pages 735-746, November.
    8. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
    9. Tarron Khemraj, 2009. "Excess liquidity and the foreign currency constraint: the case of monetary management in Guyana," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 2073-2084.
    10. Xavier Vives, 2001. "Competition in the Changing World of Banking," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 17(4), pages 535-547.
    11. Judith Gold & Mr. Ruben V Atoyan & Miss Cornelia Staritz, 2007. "Guyana: Why Has Growth Stopped? An Empirical Study on the Stagnation of Economic Growth," IMF Working Papers 2007/086, International Monetary Fund.
    12. Khemraj, Tarron, 2007. "Monetary policy and excess liquidity: the case of Guyana," MPRA Paper 53126, University Library of Munich, Germany.
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    Cited by:

    1. constantine, collin, 2013. "Why Guyana's self discovery is the missing link in its development strategy," MPRA Paper 44205, University Library of Munich, Germany.
    2. Williams, Joycelyn, 2012. "Beyond Macroeconomic Stability: The Role of Selective Interventions in Guyana’s Growth," MPRA Paper 42755, University Library of Munich, Germany.
    3. Khemraj, Tarron & Hinova, Diana, 2011. "Elected Oligarchy and Economic Underdevelopment: The Case of Guyana," MPRA Paper 29733, University Library of Munich, Germany.
    4. Khemraj, Tarron, 2013. "Bi-communalism and the economic origins of democracy: a case study," MPRA Paper 47288, University Library of Munich, Germany.
    5. Grenade, Kari & Pasha, Sukrishnalall, 2012. "Accelerating Guyana’s Growth Momentum," MPRA Paper 41960, University Library of Munich, Germany.
    6. Pasha, Sukrishnalall, 2020. "The impact of political instability on economic growth: the case of Guyana," MPRA Paper 103145, University Library of Munich, Germany.
    7. Constantine, Collin, 2014. "Growth and Distribution: A Guyana Case Study," MPRA Paper 58882, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial liberalization; growth; oligopoly interest rate;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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