What is the evidence about market quality and economic growth?
An important study of the relationship between stock market development and long-term economic growth has been recently conducted by Ross Levine and Sara Zervos (1996). They create a measure of stock market development which combines three dimensions of market quality. By this measure, a country is said to have a well- developed stock market when (a) the assets intermediated by the stock market are large when compared with GDP (b) the stock market is highly liquid, and (c) the stock market is highly integrated into world markets. Their empirical analysis controls for the independent contribution of seven kinds of other factors. After taking into account the contribution of all these factors, they find that stock market development is highly significant statistically in fore-casting future growth of per capita GDP. Their regressions imply that stock market development is also highly economically significant. For example, their regressions forecast that if Mexico or Brazil were to obtain
