China is, of course, a vast country of contrasting economic structures. Provincial level data exploiting this variation offer another opportunity for applied econometricians to test their favorite theories. In a recent working paper Genevieve Boyreau-Debray (2003) examines the banking-depth and growth relationship across 26 Chinese provinces. Interestingly, and perhaps not surprisingly, she finds the opposite relationship to that found in cross-country studies. The provinces with the greatest banking depth are the provinces that have been growing more slowly (Figure 3). (Boyreau-Debray does examine some other aspects of the financial environment: greater diversity in provincial finance does seem to help growth for example.)<sup>11</sup> The Chinese case not only raises the question of measurement: it also confronts us with the challenge of explaining just why China can have done so very well in terms of growth this past quarter century with a financial system that, though deep, has not been performing the theoreticians’ functions of a market-driven financial system to any considerable extent. Undoubtedly, there is a financial dimension here, namely the scale of investible resources: if the Chinese savings ratio averaged over 35 percent for two decades, these savings have certainly built up the stock of capital in China. Just as with other East Asian miracles, I think it’s fair to say Chinese growth can be largely attributed to the accumulation of capital and the successful shift in the application of available labor away from subsistence agriculture to higher productivity activities using this capital.

This helps us understand better how to view the role of finance in growth. You can get a long way _without_ a state of the art financial system. Even if available savings are not allocated to the most effective enterprises, the sheer volume of capital accumulation (even if not the most appropriate or best-judged design), combined with the huge productivity gain from shifting workers from subsistence agriculture to the modern economy allows very rapid growth. At the same time, for all the rapid growth that China has had, it is still not at the global production frontier. Per capita income is still less than $1,000 measured at market prices, and less than $5,000 measured at purchasing power parities.<sup>12</sup> Even the higher figure puts it into the same class (only) as Eritrea, Macedonia, Algeria or Peru. Still a long way to go to match Korea, say (with its PPP per capita income at $18,000): it will need a better financial system to get to the frontier.

# _Russia_

A more dramatic example of the way in which banking depth can be misleading comes from the former Soviet Union countries, where deposit growth through the 1980s left them with deep banking systems as it appeared. The ratio of M2 to GDP in Russia in 1990 was 81%. But here the holding of bank deposits was distorted by a number of features, including the widespread rationing (why spend your bank deposits if there is nothing to buy). Indeed, the true value of bank deposits was much lower in that price controls held prices of consumer goods far below their market-clearing values. If valued at market-clearing prices, aggregate bank deposits were much smaller, and (though

> 11 Most of the international (cross-country) studies exclude the Chinese data for one stated reason or another.

> 12 The PPP measure is better for judging living standards; perhaps less good for assessing convergence to international levels of productivity.

10