Financial Development and Economic Growth in Transition Economies: New Empirical Evidence from the CEE and CIS

Countries

Laura Cojocaru*, Saul D. Hoffman*, and Jeffrey B. Miller*

January, 2013

Abstract: We examine the role of financial development in economic growth in the former Communist countries of Central and Eastern Europe and the Commonwealth of Independent States during the first two decades since the beginning of transition. These countries, which had undeveloped financial systems under Communism, provide an interesting test of the relationship between financial development and growth. We show that credit to the private sector had a positive effect on growth in these countries; however, high levels of inflation can render the positive effect of private credit insignificant. High interest rate spreads and reduced banking competition hampered economic growth. JEL Classification: O16, P27, P34 Keywords: transition economies, CEE, CIS, financial sector development, economic growth

* Department of Economics, University of Delaware, Newark, DE, 19716, USA

I. Introduction When the transition began in Central and Eastern Europe and the former Soviet Union, the development of viable financial sectors was perceived to be an especially challenging task. Centrally-planned economies did not have financial systems designed to allocate credit to their highest value use. Instead, the financial sector functioned primarily as an accounting system for carrying out the plan. Creating a market-oriented financial system during transition presented unique problems. Unlike the situation in a developing economy where enterprises grow over time and expand their funding sources as they grow, transition economies already had large enterprises in place that would suddenly be cut off from their previous sources of funding if new financial systems did not function properly. In the more than two decades that have passed since the transition began in 1990, much progress has been achieved in the development of financial systems, but the process of creating and reforming these systems based on capitalist principles still continues and the extent of reform varies widely across the countries. A substantial body of empirical research has investigated the relationship between financial development and economic growth. Following the trailblazing work of King and Levine (1993) and the development of techniques that addressed critical endogeneity issues, this literature quite consistently finds that development of an efficient and effective financial system is, in general, a key factor determining economic growth (Beck, Levine et al. (2000)). We still know very little, however, about the relationship between financial development and economic growth under the circumstances specific to transition economies. This paper attempts to fill that knowledge gap. To date, only one paper has specifically examined the relationship between financial development and economic growth in the full set of transition countries. Focusing exclusively

on the early years of the economic transition (1993-2000), Koivu (2002) finds very mixed evidence of an impact. While a wider interest rate margin has the expected negative effect on growth, the amount of bank credit does not have the usual positive effect. These results are, however, best regarded as tentative, because of the limited time frame itself and the resulting inability to apply more advanced econometric techniques that require a lengthier time series. In this paper, we re-examine the relationship between financial development and economic growth in the transition economies of Central and Eastern Europe (CEE) and the Confederation of Independent States (CIS). We use panel data over the period 1990-2008 to estimate this relationship beyond the first post-transition decade. The longer time period also allows us to account for possible endogeneity issues, using the system Generalized Method of Moments estimation introduced by Arrelano and Bond (1991) and further developed by Arrelano and Bover (1995). We examine multiple measures of the financial system, including indicators of financial efficiency as well as financial depth. Unlike Koivu, we find that credit to the private sector is a positive factor in promoting economic growth in these transition economies. This finding is robust to controls for initial per capita income, schooling level, inflation level, and the degree of openness of the economy and government expenditure; however the relationship disappears during periods of hyperinflation. We also find that high interest rates and high bank concentration hamper economic growth in these countries. The results are consistent with the general findings on the financial development growth relationship, but nonetheless surprising in the context of the CEE and CIS countries, given the specific problems they encountered during the process of financial development. The rest of this paper is organized as follows. In Section 2, we present a selective literature review of the main theoretical and empirical findings regarding the financial

development-economic growth relationship, including papers concerned with various aspects of financial development during transition. We also offer an overview of the financial development process in the CEE and CIS countries. In Section 3 we present our data and methods. We discuss the problems associated with estimating growth equations, as well as the main econometric method used -system GMM. Section 4 describes the results of the analysis of the relationship between financial depth and financial efficiency and economic growth. The main findings are reiterated in Section 5, where we also suggest several topics for future investigation.

II. Background Literature review The study of the relationship between financial development and economic growth can be traced back to Schumpeter (1912), who argued that banks facilitate financial intermediation and promote economic growth by selecting those entrepreneurs with the most innovative and productive projects. Several decades later, Robinson (1952) suggested instead that financial development passively follows growth: Where enterprise leads, finance follows (p. 62). Later, Gurley and Shaw (1955) showed, without the use of modern statistical tools, that the development of the financial system has positive effects on the real economy, while Lewis (1955) argued that the relationship between financial development and economic growth runs in both directions. Indeed, as Levine (2003) pointed out, economists often had diverging positions regarding this relationship, from ignoring its existence altogether (Meier and Seers (1984)), to arguing that the role of finance has been exaggerated in the growth literature (Lucas (1988)), to stating that the contribution of financial markets to financial growth is so obvious it does not even warrant discussion (Miller (1998)).

The modern empirical literature in this area developed in the 1990s, following King and Levine (1993), who used data on 77 countries to analyze the effect of financial sector development on growth in real per capita GDP, the capital stock per person, and total productivity. They find consistent positive effects; for example, an increase of four percent in financial sector size led to a one percent higher rate of economic growth. To address some of the econometric problems associated with cross-country growth analysis, including reverse causation and omitted variables bias, Levine, Loayza et al. (2000) and Beck, Levine et al. (2000) used the system Generalized Method of Moments (GMM) for panel data. The results in these papers were very similar to those obtained earlier in pure cross-country analysis. Other studies generally found a positive effect of financial development on economic growth, however often depending on certain conditions. For example, in a cross-sectional study, Rousseau and Wachtel (2002) found that the effect is significantly positive only when inflation is below 5-6 percent, with the largest effect taking place during periods of disinflation. Rioja and Valev (2004a) suggested that the effects of financial development might be non-linear or dependent on exceeding certain thresholds. In their work, significant and positive effects are observed for countries situated in the middle and high range of financial development, but not as consistently for countries in the low range. Rousseau and Wachtel (2011) in a panel study for 84 countries over the period 1960-2004 found that the relationship between financial deepening and growth may be weaker for developing countries and may have weakened more generally in the past decade. Despite the very different institutional context in transition economies, very few papers have examined the effects of larger and more efficient financial systems on these economies and all have focused only on the early transition years. Only Koivu (2002) focuses on the full set of

CEE and CIS transition countries. Using data only for the period 1993-2000, she finds that the margin between lending and deposit interest rates negatively and significantly affected growth, but the size of the financial sector did not. Fink, Haiss and Vuksic (2009) find that total financial intermediation contributed to growth in nine EU accession countries 1 for the period 1996-2000, with domestic credit representing a significant factor in promoting growth, while private credit and stock market capitalization were not important. Mehl, Vespro et al. (2006) find that financial deepening had no significant effects on the growth of the South-Eastern European countries for the period 1993-2003. Moreover, they even estimate a significant negative effect of financial intermediation and monetization on growth and a positive and sometimes significant effect of the foreign bank penetration ratio. No study to date examines the CEE and CIS countries over a longer time frame and with attention to multiple measures of financial development. Together, the lack of research focused specifically on the role of financial development in transition economies, especially with more current data, and the findings that the relationship may depend on the level of development and other economy-specific factors suggest the need for further research focusing on the CIS and CEE countries. These countries provide an excellent test, because their financial systems are relatively new and vary widely.

Financial development in the CEE/CIS countries Since the 1990s, the CEE and CIS countries have made substantial progress in the creation and reform of their financial markets and institutions. Under the prior Communist regimes, banking systems were limited to passively allocating funds to firms according to a central plan. Interest rates paid on savings were set administratively, there was no credit

The accession countries studied include seven CEE transition economies. 5

evaluation of loan recipients and no risk management, and banks could not use the threat of bankruptcy and liquidation. Although the inherited structures of these countries shared many similarities, important differences did exist. For example, enterprises in Hungary, Poland and the former Yugoslavia were given some degree of independence in their decisions and there were even some private firms. Monetary holdings and trade credit were also allowed. The situation was vastly different in countries such as Bulgaria, Romania and the Soviet Union (Coricelli (2001)). During the first years after the fall of the Communist regimes, state-owned banks were freed from the influence of the Central Bank and a large share of their non-performing loans was written off (Liebscher (2007)). Later, these banks were restructured and privatized, commercial banks were created, and new, foreign-owned banks started to emerge. High levels of foreign bank ownership, pioneered by the Austrian banks, are now a striking feature of many Eastern European banking systems. 2 In many of these countries, between 60 and 90 percent of the banks are foreign-owned, mainly Austrian, followed by Belgian, German and Italian. Foreign ownership brought technological and managerial improvements, economies of scale, and arms length relationships between the financial sector and industry. It also reduced the concentration of economic power in banking markets (Liebscher (2007)) . The liberalization of the banking system encountered a series of problems and difficulties. Ineffective bankruptcy or contracting laws and the lack of enforcement mechanisms and adequate collateral guidelines often led to soft budget constraints for former state-owned firms and to moral hazard problems on the managers part. Although bank privatization and foreign ownership can harden budget constraints, some soft budget constraints continued even
2 Foreign bank ownership accelerated dramatically after 1998 and continued even after 2000, although at a slower

pace.

after the reform of the financial sector (De Haas (2001)). The enterprise sector, where the banks did most of their lending, was dominated by large firms; these firms, which were often under ineffective state ownership, often created distortions in the allocation of financial resources. Without international diversification and insufficient domestic diversification, the financial systems of these countries were very exposed to systemic shocks. As a results, most transition economies in Europe experienced major bank insolvencies in the 1990s. Moreover, during transition, lack of confidence in the sustainability of macroeconomic stability often led to reduced financial intermediation and capital flight. The governmental institutions of these countries were weak and vulnerable to pressures from various interest groups, which in turn hampered banking sector restructuring. The lack of adequate deposit insurance laws and auditing and accounting standards for firms and the often low-skilled human capital in the banking sector created additional problems. Table 1 summarizes selected economic and financial development indicators in the CEE and CIS countries in 1995 and in 2008: GDP per capita, domestic credit to the private sector as a percentage of GDP, and market capitalization of listed companies. Also shown are the corresponding measures for three Western European countries, the United States, and Japan. As of 1995, domestic credit to the private sector in the CIS countries ranged from just 1.5 percent of GDP in Ukraine to 15.2 percent in Lithuania, compared to 86-203 percent in the more developed countries. The CEE countries had greater domestic credit than the CIS countries, but, except for the Czech Republic, none were above 40 percent. In 1995, the average GDP per capita of the CEE and CIS countries was just under $2700, less than 10 percent of the level in the developed countries. Only Slovenia had GDP per capita greater than $10,000.

By 2000, many of these transition countries, especially the EU members, had carried out significant reforms of their legal and financial structures and institutions. At present, some countries have levels of credit to the private sector comparable to those of some West European countries, although others are still lagging behind. The average credit level in these countries tripled to 54.8 percent in 2008. GDP per capita also increased substantially, yet important disparities remain, both in terms of GDP per capita and of financial development. For example, GDP per capita in 2008 in Slovenia was $26,779, whereas in the Kirgiz Republic it was less than $900 per capita. Furthermore, private credit in Latvia was 90 percent of GDP, while in Armenia it was only 17 percent of GDP. This compares with private credit in the UK of over 213 percent of GDP. Market capitalization shows even more dramatic differences. Armenias market capitalization in 2008 was only 1.5 percent of GDP while in the Russian Federation market capitalization was more than 82 percent, almost equal to the market capitalization in the US. Insert Table 1 here Given the wide variation in the financial development of the CEE and CIS countries and the specific problems associated with the reform of their financial sectors, it is important to examine if the financial development-economic growth relationship holds in transition economies and to determine which components of the financial system play the most important role for the growth of these countries. A priori, in economies such as these that are lacking in capital to finance projects and education, the capital deepening aspect of financial development would be expected to be the most critical, with financial modernization starting to play a more important role as capital becomes more abundant. III. Data and Methods Methods. We estimate a standard model of economic growth augmented with measures of financial development. We model economic growth (g) in country i over time period t as a 8

function of income at the beginning of the period (yi), its level of financial development (FDi), other observable country characteristics (Xi), an unobserved country effect (i) and time effects (t): (1) , = + , + , + , + + , , for i=1N and t=1T.

In our estimation of (1), g is the average annual growth in per capita GDP over the time period, , is the log of per capita GDP at the beginning of the period, and country

characteristics are averaged over the period. The focus of the analysis is on , which measures the impact of financial sector development on economic growth. In order to measure financial development, we use multiple indicators of financial development and financial efficiency. These indicators are discussed in more detail in the data section. The estimation of growth equations has well-known statistical difficulties, including the dynamic nature of the data-generating process; the existence of potential fixed individual effects and endogenous regressors; difficulty in finding valid instruments; measurement error, omitted variables, and a small number of time periods. Moreover, current realizations of the dependent variable may be influenced by past ones. One econometric method that deals with these problems is the First-Differenced Generalized Method of Moments Estimator (difference GMM) developed by Arrelano and Bond (1991). The model is based on the idea that taking the first difference removes the time-invariant country fixed effects. Assuming that the transient errors are serially uncorrelated and that the initial conditions are predetermined, the model instruments the right-hand-side variables with lags. This method controls for time-invariant omitted variables bias, as well as provides consistent estimates, even in the presence of endogeneity and measurement errors. However, it has been found to have poor finite-sample proprieties and problems related to weak instruments may arise when the time series are persistent and the time dimension is small. Growth series indeed have these properties, since often output is averaged over periods of five years and is

relatively persistent. In this case, the difference GMM estimator has been found to behave poorly in terms of bias and precision (Arrelano and Bover (1995); Blundell and Bond (1998)). The System Generalized Method of Moments estimator introduced by Arrelano and Bover (1995) and further developed by Blundell and Bond (1998) produces consistent estimators even under these conditions and has been shown to have superior finite sample properties. 3 It makes the additional assumption that the log difference of per capita GDP is not correlated with the countrys individual effects. This assumption does not imply that country-specific effects play no role in output determination, but rather that output growth and country-specific effects are uncorrelated in the absence of conditioning variables. This allows for the use of lagged firstdifferences as instruments for equations in levels. Thus, system GMM combines the set of equations in first differences with suitable lagged levels as instruments, and with an additional set of equations in levels with suitably lagged first-differences as instruments. Including the regression in levels reduces the biases associated with small samples, since it does not eliminate cross-country variation and does not intensify measurement error. Moreover, regressions in levels have stronger correlation with their instruments than the variables in differences. Our use of the system GMM estimation procedure follows Beck, Levine et al. (2000). For all models reported in this paper, we use two tests of model specification. First, we use the Hansen test of over-identifying restrictions, which tests the overall validity of the instruments. Second, we examine the assumption of no serial correlation in the error terms. Robust two-step standard errors are computed, using the methodology suggested by Windmeijer (2005) to correct for small sample biases. As an alternative to system GMM, we also report results from an OLS specification with country fixed effects.

3 Blundell and Bond (1998) use Monte Carlo simulations and show that in the case of finite samples, system GMM

offers dramatic reduction of bias and improved precision over difference GMM estimation. These findings are also shown to hold in models with lagged dependent variables and additional right-hand-side variables, as typically encountered in estimations of growth models.

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Data. Our broadest dataset includes the following CIS and CEE countries over the period 1990-2008: Armenia, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia FYR, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, and Ukraine. 4 All data are taken from World Bank (2009) except for bank concentration, which was extracted from Beck, Demirguc-Kunt et al. (2000). In some models, we use a subset of countries to facilitate the use of some independent variables that are not available in all countries in all time periods. Economic growth is measured by the annual growth of real gross domestic product per capita based on constant local currency. Because financial development is a complex concept, we use multiple alternative measures of the size of financial intermediation and of the efficiency of the financial sector. Size is measured by three variables: Credit to the Private Sector (Private Credit), Liquid Liabilities, and Total Domestic Credit by the Banking Sector. All are measured as a percentage of GDP and transformed into natural log units. Private Credit, one of the main proxies for financial development used in recent empirical studies, refers to financial resources provided to the private sector through loans, purchases of non-equity securities, trade credits and other accounts receivable that establish a claim for repayment. Because this measure isolates credit issued to the public sector (i.e., it does not include credit issued to the government or governmental agencies), it is especially relevant for the countries studied. Liquid liabilities (M3) is the sum of currency and deposits in the Central Bank, transferable deposits and electronic currency, time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements plus travelers checks, foreign currency time deposits, commercial paper, and shares of mutual funds or market funds held by residents. Finally, Total Domestic Credit by the Banking System includes all credit to various sectors, including the public sector, bills, bonds, and securities, loans and advances. Although a deeper
4 We do not include Uzbekistan because no data on financial development is available.

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financial sector is expected to positively affect growth, we expect that credit extended to the private sector to be more significant for economic growth stimulation than government investments. The efficiency of the financial system is measured by several indicators. Net Interest Margin is equal to the difference between the interest income generated by banks or other financial institutions and the amount paid in interest to lenders, relative to assets. A priori, it is not obvious what the relationship between interest margins and growth is. Lower net interest margins could reflect more competition in the banking sector, better contract enforcement, efficiency in the legal system and a lack of corruption (Demirguc-Kunt and Huizinga (1998)). However, relatively large margins may insure a higher degree of stability for the financial system, adding to the profitability and capital of banks and better protecting them against crises. We also examine two other related measures of banking efficiency. The Interest Rate Spread is the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits. Overhead Costs are banks operating costs for salaries, motor vehicles, and fixed assets (excluding depreciation), relative to their total earning assets. Bank concentration is defined as the assets of total commercial bank assets controlled by the three largest banks. A highly concentrated commercial banking sector might result in lack of competitive pressure to attract savings and channel them efficiently to investors. On the other hand, a highly fragmented market might be evidence of undercapitalized banks. To control for other factors affecting economic growth, we use variables regularly employed in the empirical growth literature. Initial GDP per capita, measured at the beginning of each period, controls for the growth convergence effect. The standard prediction of the neoclassical models is that a country will grow faster, the further away it is from its steady state.

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Secondary school enrollment 5 is a measure of human capital and is expected to enter the regressions with a positive sign. Inflation, measured by the GDP deflator, is used as a proxy for macroeconomic stability and is expected to have a negative effect on economic growth. Time dummies are included in many of the specifications to control for common time trends in economic growth, such as common productivity changes. Appendix A1 shows summary statistics for the main variables, while Appendix A2 provides summary statistics, by country. The countries in the sample show dramatic differences in term of economic growth, financial development and macroeconomic stability, as well as important variation over time. To aggregate away short-run business cycle effects and to better proxy long-run economic growth, we follow the standard practice in the empirical growth literature by averaging data across five-year time periods in the estimation of equation (1). Because we have a 19 year time period from 1990 to 2008, we use one four-year period (1990-1993) and three five-year periods. 6 IV. Results We begin by examining the effects of financial deepening on economic growth in the CIS and CEE countries. We use system GMM and fixed effects and three indicators for financial depth. The results are shown in Table 2. Our baseline model, shown in columns (1) and (2), uses private credit as a measure of the size of financial intermediation. We present estimates with and without the schooling variable, since missing data for this variable reduces sample size. 7 In

5 We measure this as total enrollment in secondary education, regardless of age, expressed as a percentage of the

population of official secondary education age. The enrollment rate can exceed 100% due to the inclusion of overaged and under-aged students because of early or late school entrance and grade repetition. 6 Some empirical papers suggest averaging the data over longer periods of times, such as 10 years. It is not feasible in this application since we have a total time span of only 19 years.
7 Kazakhstan and Montenegro drop out of the sample completely and other countries have fewer observations

available.

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columns (3) and (4), we show the corresponding results of fixed-effects estimates with first-order autoregressive disturbances of the models estimated in (1) and (2) in order to confirm the findings of the previous models. Then, in columns (5) and (6), we use the two alternative measures of financial deepening (Liquid Liabilities and Domestic Credit) estimated with system GMM. In our baseline model, private credit is positive and statistically significant in both specifications, indicating that the exogenous component of financial deepening positively influenced economic growth in the CIS and CEE countries. Both GMM specifications pass the standard specification tests (Hansen test and Arellano-Bond test for AR(2)). These results indicate that, despite problems inherited and often inherent to transition countries, the development of a strong financial sector has the potential to stimulate the economic growth of these countries. Insert Table 2 here Although system GMM is the preferred estimation method, the results are verified using country fixed effect models (see columns (3) and (4)). Private credit is highly significant and positively related to growth, both with and without the school enrollment variable, and its coefficients are close to the ones obtained by system GMM estimation. This increases our confidence in the GMM estimates. The estimated impact of private credit is quantitatively important. Using the coefficient obtained in column (1) (the smallest value), a 10 percent higher private credit percentage translates into an annual rate of growth 0.301 percentage points higher. As a more extreme example, if Romanias credit to the private sector in 2008 were equal to that of Estonia (98.7 percent of GDP, the largest private credit in 2008 among the CEE and CIS countries) instead of its own 38.5 percent, its economic growth would have been 2.97 percentage points higher. 8 The

8 ln(98.7)-ln(38.5) *3.16=2.97, where 3.16 is the coefficient on Private Credit from Model 1

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coefficient estimate is comparable in magnitude to that found in other studies (for example Beck, Levine et al. (2000)). We find that initial GDP and inflation have negative effects that are statistically significant in most models. Secondary school enrollment has a positive effect, but is not statistically significant. Its insignificance here is not altogether surprising since secondary school is mandatory in many of these countries and the quality varies hugely from country to country. Inflation is statistically insignificant in the first specification, but its sign always matches the expectations. The two alternative measures for the size of the financial sector both have positive effects on economic growth in these countries, but neither is statistically significant at conventional levels (see columns (5) and (6)). These results suggest that it is the credit extended to the private sector that plays a critical role in promoting economic growth. For transition economies, this result is not surprising, in light of the soft budget constraints and the persistence of state-owned enterprises, especially during the first years after 1990. Even with a largely privately-owned banking system, these problems can severely distort the allocative role of financial intermediaries. In addition to the impact of growth in the size of the financial sector, we are also interested in the impact of improvements in the efficiency of the financial sector. Table 3 presents the results of regressions using several such measures discussed earlier. All estimates are by system GMM. The interest rate spread reflects the costs of intermediation that banks incur and their mark-up levels, relating to their efficiency and competitiveness. Saunders and Schumacher (2000) point out that although the ex-Communist countries have made progress, their interest rate spreads were still relatively large when compared to Western European countries. Bonin, Hasan and Wachtel (2008) suggest that much of the decrease in interest rate spreads observed since the beginning of transition may be due to a reduction in the risk in the macroeconomic environment, rather than an increase in banking competitiveness. Insert Table 3 here 15

The results in column (1) show a statistically significant and large, negative impact of the interest rate spread on economic growth. This implies that economies whose financial systems offer lower interest rate spreads experience relatively faster economic growth. The result is verified in the next specification (column (2)), where we include both the interest rate spread and a measure of credit to the private sector. While the interest rate spread retains its statistical significance and has almost the same value as previously, credit to the private sector is insignificant and its coefficient is much smaller than previously. These results, combined with the results from Table 2, suggest that while the size of the financial system is important for growth, it does not tell the entire story. The efficiency of the financial system, as measured here by the interest rate spread, is crucial for economic growth and perhaps even more so than the sheer size of financial intermediation. In column (3), we show results using the interest-rate margin in place of the interest rate spread. While the margin is related to the spread, the margin takes into account the fact that the amount of earning assets and borrowed funds might be different; for example, banks may need to keep a certain amount of assets in non-interest bearing assets due to reserve requirements. Claeys and Vander Vennet (2008) argue that the relatively high interest-rate margins observed in the CEE countries could be explained by a low degree of efficiency and market competition and that the institutional reforms that took place in these countries initially increased the interest margins before competition started to drive them down. We do not find that the interest-rate margin has a statistically significant effect on economic growth. This insignificance could be due either to the measurement errors that interest-rate margin may be subject to, or, as pointed out by Levine (2003), to differences in activity and risk premium, rather than efficiency and competition, that could be reflected by the interest rate margins. As with the interest-rate margin, we find that differences in overhead costs do not significantly affect economic growth (column (4)). Economic theory suggests that departures from perfect competition create market inefficiency, and thus, higher concentration in the capital markets would harm firms access to 16

credit, negatively impacting economic growth. On the other hand, Beck, Demirguc-Kunt et al. (2006) find empirical evidence that favors concentration-stability theories: higher bank concentration reduces the likelihood that a country will suffer a systemic banking crisis. Although their experiences were not identical, all CEE and CIS countries inherited high concentration ratios that persisted long into the transition process. We find (see column (5)) that high bank concentration has a large, negative and statistically significant effect on growth. Moreover, the effect of high bank concentration remains even when we control for private credit, which is not significant with concentration included (see column (6)). The finding is consistent with Cetorelli and Gambera (2001) who find a negative effect of concentration on growth in a cross-country study, although the effect was found to be heterogeneous across different industries. This result reinforces the finding of Table 3 (columns (1) and (2)), suggesting that the sheer increase in the size of the financial sector does not necessarily ensure higher economic growth. An uncompetitive financial system may undermine the positive effects of the financial deepening, especially in transition countries, where oftentimes many of the largest banks are still, or until recently were, state-owned. The findings in this section suggest that the quality and efficiency of the financial sector are important factors in promoting economic growth in the CIS and CEE countries, and perhaps even more so than the size of financial intermediation. High interest rate spreads negatively affect the economic growth in the transition countries, and this effect can even negate the positive effect of private credit. This negative effect seems to be at least partly due to the high concentration in the banking markets of the transition countries. Robustness checks. The main results are verified in Table 4 by including additional controls for the openness of the economy, the size of government, and the level of inflation (columns (1)-(4)). The degree of openness of the economy is measured as the sum of imports and exports as a percent of GDP. Size of government is measured by government expenditures as a percent of GDP. We focus on specifications using private credit, the interest rate spread and

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concentration as measures of financial development, since these variables were more consistently significant in the previous tables. Insert Table 4 here In column (1) we add both of the openness and the government expenditure measures to our baseline specification for the impact of private credit. The extent of openness has a negative effect on growth that is statistically significant at the 10 percent level, while the size of government has a very small (negative) and statistically insignificant effect. More importantly, the inclusion of these variables does not qualitatively alter the results concerning the effect of private credit on economic growth: the estimated coefficient of private credit is nearly the same as in the baseline model. In column (2), we replace the previous measure of inflation with a variable indicating only inflation that exceeds an average of 40 percent for a 5-year period. In this specification, we find that high inflation not only has a negative, statistically significant effect on growth, but its inclusion renders the effect of private credit insignificant. This result suggests that while the deepening of the financial sector can spur economic growth, periods of grave macroeconomic instability may negate this effect. High rates of inflation discourage financial intermediation and the confidence in the financial system itself as investors may prefer real assets to financial assets during such periods. We also verify the negative effects of high interest rate spreads and high bank concentration by adding the degree of openness and government expenditure as controls in columns (3) and (4). The effect of the interest rate spread is unchanged, while the effect of bank concentration is now just short of statistical significance (p-value 0.13) although the coefficient estimate is essentially unchanged. Finally, in order to increase the number of observations, we used time periods of three years rather than five years for computing period averages. We also exclude 2008, since it represented the beginning of the financial crisis and because with short periods, one year could have a larger impact. In order to maximize the sample size, we also excluded the schooling variable, which was consistently insignificant in the previous models. The results are shown in 18

columns (5)-(7). Each model also included time dummies for five of the six periods (results not shown in Table 4). Again the findings confirm that private credit positively influences economic growth, although with a coefficient slightly smaller, but not very different from the ones in the previous results. Only the interest rate spread and bank concentration lose their statistical significance in this setting, although the signs of the estimated coefficients still conform to expectations. The lack of significance suggests that the negative role of high interest rate spreads and bank concentration is predominantly felt in the long-run, whereas, more credit to the private sector plays a positive role for the economy both in the medium and the long-run. 9 Because of sample size issues, we were unable to test whether the relationship between financial development and economic growth varied between the CEE and CIS countries. We did test for a simple additive difference in growth rates between CEE and CIS countries via a dummy variable. We found no evidence of growth rates differed in this way between the two sets of countries. V. Conclusion In this paper, we empirically investigated the effect of financial sector development on economic growth in the former CEE and CIS Communist countries over the transition years from 1990 through 2008. These countries are a particularly interesting example of this relationship because they entered the transition with very undeveloped financial systems and because there is substantial variation among them in the pace of financial development. Furthermore, problems specific to the transition period in these countries, such as soft budget constraints and low bank competition, could have weakened the potential positive effects of financial development on economic growth. Thus, we were particularly interested in identifying the elements of financial development (increase in size, efficiency, market competition) that had the most important role
9 Because of sample size issues, we were unable to test whether the relationship between financial development and

economic growth varied between the CEE and CIS countries. We did test for a simple additive difference in growth rates between CEE and CIS countries through a dummy variable, but estimates were insignificant. We also tested using five-year rolling averages. Results were similar to those reported in Tables 2 and 3.

19

in stimulating economic growth. To this end, we used several alternative measures to proxy both financial depth and financial efficiency. Because of the possible endogeneity of some of the regressors, we use system GMM in our estimation, following an approach previously used by Beck, Levine et al. (2000). We find that credit to the private sector plays a positive and economically large role in spurring economic growth in these transition economies. Moreover, this result is robust, with the exception of periods of grave macroeconomic instability proxied by hyperinflation. Additional indicators of financial depth such as liquid liabilities and domestic credit also have positive effects, but they are not statistically significant at conventional levels. High interest rate spreads negatively affect economic growth and the statistical significance of the coefficient is maintained even when private credit is included in the regression. We find no evidence that net interest rate margins affect growth, and that overhead costs do. However, high bank concentrationa possible underlying cause of the large interest rate spreadseems to lower economic growth. Our findings for these transition economies are broadly consistent with the overall positive findings in the financial development-economic growth literature. In this respect, our findings on the role of financial credit in transition economies do not support the more negative findings of Koivu (2002), who found, using an earlier sample and a different econometric technique, that private credit did not contribute to economic growth in the CEE and CIS countries. However, our analysis shows that the most important aspect of financial deepening is an increase in credit to the private sector. Moreover, a mere increase in the size of financial intermediation does not guarantee growth unless it is also accompanied by banking efficiency improvements and competition in the banking sector While our estimates are based on a longer time series than in previous research, future research using additional data is needed to verify if the relationship between financial development and economic growth will change in magnitude as these economies continue to mature. Moreover, especially in light of the 2008 financial crisis, additional research on the consequences of financial crises on these economies would be valuable. Lastly, recent economic 20

advancements suggest that financial development can affect the distribution of income in a country and possibly decrease povertya topic of much importance for the CEE and CIS countries.

21

Table 1 Financial development and macroeconomic indicators in CEE, CIS and selected developed countries, 1995 and 2008 Domestic credit to private sector (% of GDP) 1995 2008 CIS Countries Armenia Belarus Kazakhstan Kyrgyz Republic Moldova Russian Federation Ukraine CEE Countries Bulgaria Croatia Czech Republic Estonia Georgia Hungary Macedonia, FYR Latvia Lithuania Poland Romania Serbia Slovak Republic Slovenia Developed Countries France Germany United Kingdom United States Japan CIS & CEE Avg. Dev. Country Avg.
Source: WorldBank (2009)

Market capitalization of listed companies (% of GDP) 2008 1.5 -23.5 2.1 -82.2 13.5 17.8 38.6 22.6 8.5 2.6 12.0 8.7 4.8 7.7 17.1 10.0 24.3 5.4 21.6 52.3 30.3 70.0 82.6 65.6 17.1 60.2

GDP per capita (current US$) 1995 2008 456 1,371 1,288 362 477 2,670 936 1,556 4,722 5,349 3,029 569 4,323 2,266 2,082 2,177 3,604 1,564 3,873 6,229 8,436 837 1,665 11,339 3,899

7.3 6.1 7.1 12.5 6.7 9.4 1.5 39.9 26.5 70.8 16.3 6.1 22.6 23.1 8.1 15.2 16.9

17.4 28.8 50.1 36.5 42.0 73.7 74.5 64.9 52.5 98.7 33.3 69.6 43.8 90.2 62.7 49.9 38.5 38.4 44.7 85.6 107.9 107.8 213.4 190.5 163.5

36.4 25.2 86.0 100.4 113.1 135.5 203.9

6,546 15,636 20,760 17,223 2,931 15,409 4,673 14,909 14,096 13,823 9,300 6,811 4,706 17,565 10,460 26,779 45,981 44,471 43,088 46,717 38,443 10,607 43,740

26,451 30,901 19,944 27,560 41,968 2,698 29,365

18.0 54.8 127.8 156.6

22

Table 2 Financial depth and economic growth, CEE and CIS countries, 1990-2008 System GMM (1) (2) 3.16** 4.33* (2.17) (1.85) Fixed Effects (3) (4) 4.43** 4.66** (4.58) (3.60) System GMM (5) (6)

Private Credit Liquid Liabilities Domestic Credit Initial GDP School Enrollment Inflation Constant Time dummies # obs. # countries Hansen Test (p-value) R-sq

5.09 (1.32) 3.72 (1.57) -5.14* (1.90) 0.56 (0.26) -1.24** (2.21)

-5.61** (2.94) 1.14 (0.61) -0.65 (1.17)

-4.88** (2.14)

-1.04* (1.87)

yes 77 23 0.53

yes 86 25 0.77

-9.71** (3.45) 7.03 (0.94) -2.16** (4.75) -2.92 (0.10) no 54 22 0.72

-10.37** (2.92)

-2.27** (5.02) 26.56** (3.43) No 61 24 0.25

-5.61* (1.86) -0.48 (0.18) -0.93 (1.47)

yes 78 23 0.34

yes 78 23 0.52

Note: Dependent variable is log GDP per capita growth. Financial system variables are measured as a proportion of GDP and are in ln units. System GMM: Arrelano-Bond robust, two-step estimation. t-statistics in parentheses * denotes statistical significance at the 10% level, ** at 5% or less

23

Table 3 Financial efficiency and economic growth, CEE and CIS countries, 1990-2008

(1) Private Credit Interest Rate Spread Net Interest Margin Overhead Costs Concentration Initial GDP Inflation School Enrollment Time dummies # obs. # countries Hansen Test (p-value) -4.16** (2.11) -0.70 (1.18) 3.53* (1.70) yes 71 22 0.23 -2.30** (2.48)

(2) 0.42 (0.29) -2.04* (2.00)

(3)

(4)

(5)

(6) 0.31 (0.31)

0.28 (0.11) -3.36 (0.89) -2.7** (2.17) -3.09** ( 2.85) -1.39** (2.85) 2.07* (1.91) yes 73 23 0.20 -2.60* (1.87) -3.24** (2.30) -1.32** (3.48) 1.91* ( 1.79) yes 70 22 0.43

-4.17* (1.92) -.41 (0.61) 2.86 (1.14) yes 70 22 0.38

-3.69 (1.64) -1.30** (2.08) 2.64 (1.24) yes 70 23 0.08

-4.09** (2.57) -0.52 (0.63) -0.21 (0.07) yes 71 23 0.66

Dependent variable is log GDP per capita growth. Note: System GMM: Arrelano-Bond robust, two-step estimation. t-statistics in parentheses * denotes statistical significance at the 10% level, ** at 5% level or less

24

Table 4 Robustness tests, financial depth, financial efficiency and economic growth, CEE and CIS countries, 1990-2008

Private Credit Interest Rate Spread Concentration Initial GDP School Enrollment Inflation Hyperinflation Openness Government expenditure Time dummies # obs. # countries Hansen Test (p-value)

(1) 3.22** (2.39)

(2) 1.55 (1.20)

(3)

(4)

(5) 2.24** (2.34)

(6)

(7)

-2.22** (2.48) -2.60 (1.56) -4.24** -3.07** -0.45* (4.24) (2.20) (1.70) 4.07* 2.25 (2.01) (1.29) -0.78 -1.43* -2.05** (1.30) (2.06) (8.83)

-0.55 (0.92) -1.87 (0.88) -0.15 (1.03)

-5.15** (3.25) 1.78 (1.01) -.80 (1.30)

-2.78* (1.72) 0.99 (1.06)

-0.14 (1.46)

(2.32)

-1.23** (2.98)

-2.23* (1.80) -0.10 (0.67) yes 77 23 0.56

-1.03** (2.88) -1.03 (0.97) -0.08 (0.71) yes 78 23 0.89

-1.78 (-1.05) -.03 (0.15) yes 71 22 0.28

-0.01 (0.01) -0.05 (0.18) yes 70 22 0.19

yes 126 25 0.26

yes 110 23 0.61

yes 108 22 0.30

Dependent variable is log GDP per capita growth. Note: System GMM: Arrelano-Bond robust, two-step estimation. t-statistics in parentheses * denotes statistical significance at the 10% level, ** at 5% level or less.

25

REFERENCES

Arrelano, M. and S. Bond (1991). "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations." Review of Economic Studies, Vol. 58(2): 277-297. Arrelano, M. and O. Bover (1995). "Another Look at the Instrumental-Variable Estimation of Error-Components Models." Journal of Econometrics, Vol. 68: 29-52. Beck, T., A. Demirguc-Kunt, et al. (2000). "A New Database on Financial Development and Structure." World Bank Economic Review, Vol.14: 597-605. Beck, T., A. Demirguc-Kunt et al. (2005). "Finance, Firm Size, and Growth." Policy Research Working Paper, World Bank. Beck, T., A. Demirguc-Kunt et al. (2006). "Bank Concentration, Competition, and Crises: First Results." Journal of Banking & Finance, Vol. 30(5): 1581-1603. Beck, T., R. Levine, et al. (2000). "Finance and the Sources of Growth." Journal of Financial Economics, Vol. 58(1-2): 261-300. Blundell, R. and S. Bond (1998). "Initial conditions and moment restrictions in dynamic panel data models." Journal of Econometrics, Vol. 87: 115-143. Bonin, J., I. Hasan, and P. Wachtel. (2008). "Banking in Transition Countries." BOFIT Discussion Paper. Cetorelli, N. and M. Gambera (2001). "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data." Journal of Finance, Vol. 56(2): 617648. Claeys, S. and R. Vander Vennet (2008). "Determinants of Bank Interest Margins in Central and Eastern Europe: A Comparison with the West." Economic Systems, Vol. 32: 197-216. Coricelli, F. (2001). "The Financial Sector in Transition: Tales of Success and Failure" in G. Caprio, Honohan, P., Stiglitz, J. (eds.), Financial Liberalization: How Far, How Fast? Cambridge: Cambridge University Press. De Haas, R. (2001). "Financial Development and Economic Growth in Transition Economies: A Survey of the Theoretical and Empirical Literature." Research Series Supervision, Netherlands Central Bank. Demirguc-Kunt, A. and H. Huizinga (1998). "Determinants of Commercial Banks Interest Margins and Profitability." Policy Research Working Paper Series, The World Bank. Fink, G., P. Haiss, and G. Vuksic (2009). "Contribution of financial market segments at different stages of development: Transition, cohesion and mature economies compared." Journal of Financial Stability, Vol 5, 432-455. Gurley, J. G. and E. S. Shaw (1955). "Financial aspects of economic development." American Economic Review, Vol. 45 (4): 515-538. King, R. G. and R. Levine (1993). "Finance, Entrepreneurship, and Growth-Theory and Evidence." Journal of Monetary Economics, Vol. 32(3): 513-542. Koivu, T. (2002). "Do Efficient Banking Sectors Accelerate Economic Growth in Transition Countries?" BOFIT Discussion Paper, No. 14. Levine, R. (2003). "More on Finance and Growth: More Finance, More Growth?" Federal Reserve Bank of St. Louis Review, Vol. 85(4). Levine, R., N. Loayza, et al. (2000). "Financial Intermediation and Growth: Causality and Causes." Journal of Monetary Economics, Vol. 46: 31-77. Lewis, A. (1955). The Theory of Economic Growth. London: Allen and Unwin. 26

Liebscher, K. et al., (eds). (2007). Financial Development, Integration And Stability: Evidence from Central, Eastern And South-Eastern Europe. Cheltenham, UK: Edward Elgar. Lucas, R. (1988). "On the Mechanics of Economic Development." Journal of Monetary Economics, Vol. 22(1): 3-42. Mehl, A., C. Vespro, et al. (2006). "Financial Sector Development in South-Eastern Europe: Quality Matters" in K. Liebscher et al (eds.), Financial Development, Integration and Stability. Cheltenham, UK: Edward Elgar. Meier, G. and D. Seers (1984). Pioneers in Development. New York, Oxford University Press. Miller, M. (1998). "Financial Markets and Economic Growth." Journal of Applied Corporate Finance, Vol. 11(3): 8-14. Rioja, F. and N. Valev (2004a). "Does One Size Fit All? A Reexamination of the Finance and Growth Relationship." Journal of Development Economics, Vol. 74(2): 429-447. ___________ (2004b). "Finance and the Sources of Growth at Various Stages of Economic Development." Economic Inquiry, Vol.42(1): 127-140. Robinson, J. (1952). The Rate of Interest and Other Essays. London: Macmillan. Rousseau, P. and P. Wachtel (2002). "Inflation Thresholds and the Finance-Growth Nexus." Journal of International Money and Finance, Vol. 6: 777-793. ___________ (2011). "What is Happening to the Impact of Financial Deepening on Economic Growth?" Economic Inquiry, Vol. 49 (1): 276-288. Saunders, A. and L. Schumacher (2000). "The Determinants of Bank Interest Margins: an International Study." Journal of International Money and Finance, Vol. 19: 813-832. Schumpeter, J. (1912). The Theory of Economic Development. Cambridge, MA: Harvard University Press. Windmeijer, F. (2005). "A Finite Sample Correction for the Variance of Linear Efficient TwoStep GMM Estimators." Journal of Econometrics, Vol. 126(1): 25-51. World Bank (2009). World Development Indicators CD. Washington, DC: World Bank.

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APPENDIX

Table A1: Economic Growth and Financial System Characteristics, CIS and CEE countries, 1990-2008 Variable Growth Private Credit Inflation Rate Initial GDP/Capita School Enrollment Liquid Liabilities/GDP Interest Rate Spread Net Interest Margin Overhead Costs/Total Assets Bank Concentration #obs 101 90 77 97 87 91 78 76 77 79 Mean 0.92 28.63 161 2798 90.97 35.03 27.50 0.07 0.06 0.74 StDev 8.65 19.62 574 2882 6.97 18.55 89.50 0.05 0.03 0.17 Min. -26.76 1.72 0.50 178 76.59 7.08 1.60 0.02 0.01 0.19 Max. 16.09 82.14 4735 16887 104.76 76.63 781.80 0.29 0.16 1.00

Source: World Development Indicators CD, World Bank.

28

Table A2: Economic Growth and Financial System Characteristics, CIS and CEE countries, 1990-2008, by country
Variable Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Mean 2.27 387.59 12.65 0.80 19.25 2.53 363.51 13.70 0.84 15.95 5.04 4.93 47.66 0.61 12.65 1.52 87.11 45.03 0.75 34.22 0.23 189.84 43.25 0.62 203.37 1.48 9.90 56.65 0.73 5.38 1.29 83.01 44.56 0.92 5.31 -1.62 1369.28 11.41 0.76 21.88 1.58 14.62 37.77 0.70 4.54 StDev 14.56 449.63 8.00 0.15 12.47 7.13 345.29 6.14 0.11 16.33 1.47 4.15 11.83 0.16 8.46 5.73 113.06 24.73 0.25 43.22 8.82 353.87 12.24 0.03 385.62 3.80 9.64 17.08 0.14 1.23 7.82 133.08 26.02 0.07 3.26 16.83 1982.81 8.55 0.07 8.83 4.22 10.05 13.77 0.13 2.60 Min. -19.43 1.94 7.48 0.63 11.66 -6.28 17.15 9.45 0.75 1.55 4.00 0.81 35.44 0.49 4.81 -5.49 4.65 17.35 0.44 5.97 -12.89 3.92 29.47 0.61 8.36 -3.94 2.10 41.60 0.60 4.32 -9.41 4.63 23.45 0.83 2.68 -26.76 5.83 5.04 0.72 13.42 -4.66 4.10 23.93 0.61 2.06 Max. 11.50 863.30 24.41 0.93 33.64 10.33 743.73 20.74 0.96 38.37 6.08 9.10 59.06 0.79 21.62 6.91 245.71 74.71 1.00 97.69 6.14 720.31 58.01 0.66 781.79 4.90 22.47 73.21 0.92 7.04 7.96 281.17 82.14 0.98 8.96 8.82 4210.26 21.13 0.84 31.04 4.68 26.04 56.70 0.89 6.82

Armenia

Belarus

Bosnia & Herzegovina

Bulgaria

Croatia

Czech Republic

Estonia

Georgia

Hungary

29

Kazakhstan

Kyrgyz Republic

Latvia

Lithuania

Macedonia, FYR

Moldova

Montenegro

Poland

Romania

Russian Federation

Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread Growth Inflation Private Credit Bank Concentration Interest Rate Spread

1.40 330.22 29.65 0.70 --0.98 128.32 7.37 0.86 22.65 1.71 81.82 33.56 0.59 19.28 0.59 132.23 24.01 0.82 5.18 -0.36 161.62 34.37 0.86 10.91 -1.79 148.71 14.50 0.78 7.74 3.76 9.94 27.44 -5.21 3.55 18.10 26.15 0.61 39.58 1.62 72.84 15.73 0.74 15.35 0.54 196.20 18.00 0.48 36.40

8.36 435.11 19.74 0.06 -6.08 203.48 2.90 0.04 3.01 10.29 141.08 29.63 0.13 22.06 10.07 240.38 16.42 0.08 2.71 4.98 294.32 17.54 0.11 6.66 9.76 228.87 10.62 0.23 2.56 3.69 0.83 25.13 --2.93 18.35 7.21 0.08 68.55 5.73 64.78 9.90 0.13 4.88 8.00 292.31 10.04 0.28 44.50

-8.46 11.68 10.31 0.66 --8.97 8.51 4.41 0.83 19.36 -13.61 3.49 11.91 0.48 4.33 -14.28 -0.16 14.06 0.75 2.35 -7.30 3.65 18.54 0.76 5.72 -12.33 11.28 5.57 0.53 5.01 0.25 9.35 9.67 -5.21 -0.49 3.04 19.65 0.53 3.71 -6.06 12.59 9.56 0.66 9.72 -7.94 16.73 11.23 0.19 6.41

9.25 937.34 49.30 0.77 -4.20 431.82 10.20 0.89 25.25 7.94 293.24 77.06 0.78 51.57 7.59 492.28 48.55 0.93 8.25 4.48 602.55 59.34 1.00 18.42 7.42 489.71 29.14 1.00 10.08 7.60 10.53 45.21 -5.21 5.99 41.44 35.95 0.70 142.38 7.37 159.00 27.15 0.89 18.40 7.69 630.70 32.67 0.85 87.53

30

Growth -1.52 Inflation 31.27 Private Credit 28.16 Bank Concentration -Interest Rate Spread 29.48 Slovak Republic Growth 2.24 Inflation 9.31 Private Credit 45.74 Bank Concentration 0.83 Interest Rate Spread 5.32 Slovenia Growth 2.26 Inflation 34.69 Private Credit 39.42 Bank Concentration 0.68 Interest Rate Spread 20.82 Tajikistan Growth -2.86 Inflation 186.99 Private Credit 16.01 Bank Concentration 1.00 Interest Rate Spread 24.80 Turkmenistan Growth 2.71 Inflation 414.50 Private Credit 4.31 Bank Concentration -Interest Rate Spread -Ukraine Growth -1.27 Inflation 407.79 Private Credit 16.83 Bank Concentration 0.69 Interest Rate Spread 26.57 Notes: Figures are averages for five-year time periods. Source: WorldBank (2009)

Serbia

12.19 19.95 2.31 -20.72 6.45 7.91 7.60 0.10 0.86 3.71 52.73 19.11 0.12 30.55 11.33 213.47 3.56 -18.65 12.73 497.15 4.07 --9.58 610.09 20.76 0.27 14.81

-19.15 11.54 25.62 -10.88 -7.04 3.04 38.24 0.76 4.38 -3.29 3.02 26.23 0.59 3.80 -15.05 20.51 12.91 1.00 13.45 -8.86 13.60 1.72 ---9.85 14.76 2.03 0.39 7.63

7.07 51.43 30.15 -51.81 7.30 20.88 56.14 0.98 6.39 4.52 113.39 67.00 0.85 66.57 7.06 471.73 19.90 1.00 46.33 16.09 1043.57 9.01 --7.13 1302.00 46.73 1.00 40.69

31