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Economic growth has been becoming dominant orientation in development implementation nearly in almost all countries in the world. Economic growth itself can not be separated from the role of financial system. Some studies empirically prove that there is significant relationship between development of financial system and economic growth. Countries with low earnings usually have a very primitive financial system. By this system, most of the roles of financial sectors are performed by commercial banks. Possibly well financial markets unable don’t grow nor even exist. On the other side, countries with high earnings usually have more complex financial system acting as intermediation among members and various financial trading.
A dynamic and healthy economics requires financial system having a capability to deliver fund efficiently from depositing community to public having productive investment opportunities (Mishkin, 1995). In the theory of Endogeneus Growth presented by Solow it is said that running of good financial system function is expected to push the improvement of physical capital and also human capital (Zulverdi, Syarifuddin, and Prastowo, 2005:1).Hamilton (1781) argues that banks are the best engines which have ever been invented for creating economic growth. Others, however, question wheter finance exerts a first-order, causal impact on economic activity (Robinson 1952; Lucas 1988). However, financial system is claimed not only to be able to implement its functions well, but also to have high resistence.
The history of world economic development wich always teaches economic crisis happening in a country or international scale, always begins with a crisis in financial sector. Like economic crisis knocking Indonesia in 1997, because of the low economic system resistence, Indonesia financial system dominated by banking can not bear the negative impact arising from exchange rate crisis. At the time the level of Indonesian proverty increased 40,3 percent. The level of economic growth in Indonesia decreased 13,1 percent. Since then, Indonesia has been having relatively low economic growth, only around averagely 4,5 percent in a year (Kuncoro, 2009).
Without financial system resistence, economic development process which has been running in long time can fall to pieces in a second. The development of well functioning financial system and with high resistence is a well supporting action for the recovery acceleration of Indonesian economic as a developing country. In 2008 economic growth could achieve 6,1 percent, which is the highest record after economic crisis in 1998 (Kuncoro, 2009). In next five years, the Goverment will stimulate economic growth in a range of 6,3 percent - 6,8 percent a year. To achieve this target, the goverment needs 30 percent the investatment from GDP (Gross Domestic Product). Based on the calculation from Kadin, to achieve the target, the fund needed is afford 2,910 quintillion rupiahs (Sunarsip, 2010).
In relation to that, one of debatable aspects in economic system development is the influence of financial system structure towards economic growth. Some results of researches have proved that monetary system development is closely related with level of investment and economic growth. Various theoretical models (Levine, 1997; Beck et. al., 2001; Wachtel, 2001) explain the relationship between financial system type with level of investment and economic growth. Theoretical model from Dewatripont and Maskin (1995) present that decentralization of economic system, consisting of many small banks, more effectively pushes investment compared to decentralization of financial system, consisting of few big banks. The theory is also supported by Burkhart, Gromb and Panunzi (1997), where concentration of ownership of bank easily influences commitment of investor to push the investment.
Huang and Xu (1999) expresses that big banks give credit concentrated in industry with low level of uncertainty and artificial investment. According to Schumpeter (1911), enterpreneurship and banking are two key sources of economic development. Bankers provides loans to the most productive entrepreneurs who play roles pushing growth. Gerschenkron (1962) submits hypothesis connecting economic "retrogression" with financial. He observes English as pioneer of industrialization, Germany as moderate backwardness and Russia as extreme backwardness. From this classification, Gerschenkron (1962) finds that in English, private companies supply enterpreneurship and capital to banking. In Germany, bank supply enterpreneurship and finance private companies. In Russia, the source of enterpreneurship and financial is supplied by government to private companies. Gerschenkron hypothesis (1962) states that governments of developing countries start and finance industrialization and then banks finance their own financial at the next phase. Taiwan, Korea, Singapore, China and other developing countries possibly follow this evolution for examples.
Although the strong relationship between financial and economic development has been identified by a set of cross country study, the causal relation between both of variables in time series context doesn't grow well, until Patrick research (1966: 174) mentions that there is "improvement of number and varieties of financial institution and substantial increase of not only money proportion but also total of all financial assets to GNP and to tangible wealth" during the time of economic development. Basically, there is a question, if Financial development pushes economic growth, or it simultaneously is influenced by some factors.
Patrick (1966: 174) submits two hypothesis as to test the causality. He defines as "demand following" phenomenon where "forming of modern financial institution, asset, financial leverage and related financial service of the institution is as demand response of services by investor and depositor in real economic". Farther he emphasizes that "in evolutionary, development of financial system is continuation consequence from process having an big effect to economic development." This implicates that economic growth precedes financial development in time series context. On the contrary, Patrick (1966: 175) state that "supply leading" phenomenon as "forming of financial institution and supply asset and related financial leverage and service as the increase of service demand, especially demand of the entrepreneurs at sector influencing growth". Further Patrick (1966: 177-178) explains how supply leading, in financial system can accelerate capital accumulation and economic growth.
First, financial institution can push allocation of total numbers of tangible wealths which is as more efficient (capital in wide meaning), by bringing change in the ownership and in the composition through intermediation among various types of asset holder. Second, financial institution can push allocation of new investment to capital stock which is more efficient from usage that is relatively less productive to be more productive, with intermediation between depositors and entrepreneur investors. Third, they can push improvement of capital accumulation by providing more incentives to deposit, invest and work.
Patrick (1966: 185) concludes that "development of financial system not only accommodates but even pushes growth". In this cognition, Financial development causes economic growth, and implicates that Financial development precedes economic growth in time series context.The endogenous economic new growth theory (Romer, 1986, 1990) has given new motivation to the relation between growth and financial development like models that assuming savings behavior directly influences not only the equilibrium of income but also level of growth (Greenwood and Jovanovic, 1990; Bencivenga and Smith, 1991). Thereby financial market has strong influence in real economic activity. Hermes (1994) states that the financial liberalization and new growth theory basically assumes that financial development pushes economic growth.
A dynamic and healthy economics requires financial system having a capability to deliver fund efficiently from depositing community to public having productive investment opportunities (Mishkin, 1995). In the theory of Endogeneus Growth presented by Solow it is said that running of good financial system function is expected to push the improvement of physical capital and also human capital (Zulverdi, Syarifuddin, and Prastowo, 2005:1).Hamilton (1781) argues that banks are the best engines which have ever been invented for creating economic growth. Others, however, question wheter finance exerts a first-order, causal impact on economic activity (Robinson 1952; Lucas 1988). However, financial system is claimed not only to be able to implement its functions well, but also to have high resistence.
The history of world economic development wich always teaches economic crisis happening in a country or international scale, always begins with a crisis in financial sector. Like economic crisis knocking Indonesia in 1997, because of the low economic system resistence, Indonesia financial system dominated by banking can not bear the negative impact arising from exchange rate crisis. At the time the level of Indonesian proverty increased 40,3 percent. The level of economic growth in Indonesia decreased 13,1 percent. Since then, Indonesia has been having relatively low economic growth, only around averagely 4,5 percent in a year (Kuncoro, 2009).
Without financial system resistence, economic development process which has been running in long time can fall to pieces in a second. The development of well functioning financial system and with high resistence is a well supporting action for the recovery acceleration of Indonesian economic as a developing country. In 2008 economic growth could achieve 6,1 percent, which is the highest record after economic crisis in 1998 (Kuncoro, 2009). In next five years, the Goverment will stimulate economic growth in a range of 6,3 percent - 6,8 percent a year. To achieve this target, the goverment needs 30 percent the investatment from GDP (Gross Domestic Product). Based on the calculation from Kadin, to achieve the target, the fund needed is afford 2,910 quintillion rupiahs (Sunarsip, 2010).
In relation to that, one of debatable aspects in economic system development is the influence of financial system structure towards economic growth. Some results of researches have proved that monetary system development is closely related with level of investment and economic growth. Various theoretical models (Levine, 1997; Beck et. al., 2001; Wachtel, 2001) explain the relationship between financial system type with level of investment and economic growth. Theoretical model from Dewatripont and Maskin (1995) present that decentralization of economic system, consisting of many small banks, more effectively pushes investment compared to decentralization of financial system, consisting of few big banks. The theory is also supported by Burkhart, Gromb and Panunzi (1997), where concentration of ownership of bank easily influences commitment of investor to push the investment.
Huang and Xu (1999) expresses that big banks give credit concentrated in industry with low level of uncertainty and artificial investment. According to Schumpeter (1911), enterpreneurship and banking are two key sources of economic development. Bankers provides loans to the most productive entrepreneurs who play roles pushing growth. Gerschenkron (1962) submits hypothesis connecting economic "retrogression" with financial. He observes English as pioneer of industrialization, Germany as moderate backwardness and Russia as extreme backwardness. From this classification, Gerschenkron (1962) finds that in English, private companies supply enterpreneurship and capital to banking. In Germany, bank supply enterpreneurship and finance private companies. In Russia, the source of enterpreneurship and financial is supplied by government to private companies. Gerschenkron hypothesis (1962) states that governments of developing countries start and finance industrialization and then banks finance their own financial at the next phase. Taiwan, Korea, Singapore, China and other developing countries possibly follow this evolution for examples.
Although the strong relationship between financial and economic development has been identified by a set of cross country study, the causal relation between both of variables in time series context doesn't grow well, until Patrick research (1966: 174) mentions that there is "improvement of number and varieties of financial institution and substantial increase of not only money proportion but also total of all financial assets to GNP and to tangible wealth" during the time of economic development. Basically, there is a question, if Financial development pushes economic growth, or it simultaneously is influenced by some factors.
Patrick (1966: 174) submits two hypothesis as to test the causality. He defines as "demand following" phenomenon where "forming of modern financial institution, asset, financial leverage and related financial service of the institution is as demand response of services by investor and depositor in real economic". Farther he emphasizes that "in evolutionary, development of financial system is continuation consequence from process having an big effect to economic development." This implicates that economic growth precedes financial development in time series context. On the contrary, Patrick (1966: 175) state that "supply leading" phenomenon as "forming of financial institution and supply asset and related financial leverage and service as the increase of service demand, especially demand of the entrepreneurs at sector influencing growth". Further Patrick (1966: 177-178) explains how supply leading, in financial system can accelerate capital accumulation and economic growth.
First, financial institution can push allocation of total numbers of tangible wealths which is as more efficient (capital in wide meaning), by bringing change in the ownership and in the composition through intermediation among various types of asset holder. Second, financial institution can push allocation of new investment to capital stock which is more efficient from usage that is relatively less productive to be more productive, with intermediation between depositors and entrepreneur investors. Third, they can push improvement of capital accumulation by providing more incentives to deposit, invest and work.
Patrick (1966: 185) concludes that "development of financial system not only accommodates but even pushes growth". In this cognition, Financial development causes economic growth, and implicates that Financial development precedes economic growth in time series context.The endogenous economic new growth theory (Romer, 1986, 1990) has given new motivation to the relation between growth and financial development like models that assuming savings behavior directly influences not only the equilibrium of income but also level of growth (Greenwood and Jovanovic, 1990; Bencivenga and Smith, 1991). Thereby financial market has strong influence in real economic activity. Hermes (1994) states that the financial liberalization and new growth theory basically assumes that financial development pushes economic growth.
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