Financial Deepening in Argentina: Diagnosis and Policy Recommendations

As Argentina has been unable to embark on a sustainable GDP growth process for several decades now, the development of the banking system presents itself as a plausible policy goal to unleash the countrys productive potential. Building on the law and finance literature, we study the factors that may be behind the shallow level of banking intermediation in Argentina in the last 15 years. To this end, we run a number of cross-section and panel regressions for up to 154 countries, which confirm that adequate macroeconomic and institutional conditions are key when it comes to explaining financial depth around the world. In particular, to shed light on the Argentine case, we use the estimated coefficients to conduct some simulations, under the assumption that Argentina converges to the 75th percentile in our international sample in terms of macroeconomic stability and institutional (creditor protection) quality. Under this optimistic scenario, the results point to a sizable increase of about 40 percentage points in the ratio of private credit to GDP, with most of the improvement being explained by the macroeconomic upgrade. Of course, for this outcome to materialize, the country should stick, for a number of years, to a consistent reform program to build predictability and trust among both depositors and banks.