On July 22, 2021, an online meeting of the Academic Board of the Gaidar Institute was held, during which Candidate of Economic Sciences, Director of the Center for Institutions Analysis and Financial Markets of the RANEPA IAES Alexander Abramov presented his study “The Stock Market through the Prism of Capitalization and the Role of the State in the Economy: Long-Term Trends in 1880–2020”.

The co-authors of the study were Doctor of Economic Sciences, Head of the Gaidar Institute’s Center for Institutional Development, Ownership and Corporate Governance, Director of the RANEPA Institute of EMI Alexander Radygin; and Researcher at the Center for Institutions Analysis and Financial Markets of the RANEPA IAES Maria Chernova.

According to the authors of the study, capitalization remains one of the key indicators of corporate performance and the stock market development level, while the capitalization/GDP ratio makes it possible to compare data across different countries and historical eras. At the same time, the movement patterns of the capitalization/GDP ratio have been applied in analyzing historical trends less often than returns of stock indexes. Such a long period (140 years) was used by the researchers because an analysis of long historical data series can result in a better insight into the current problems of financial markets and their development prospects.

The authors of the study analyzed the trends in the capitalization movement patterns across the developed countries, as well as the macroeconomic and financial factors influencing the value of that indicator. Within the framework of their study, they broke the eras and periods of capitalism evolution in the developed countries into specific periods; identified the trends of the average capitalization movement in each country during different historical periods; assessed the role in that movement of the market value of shares and net capital inflow; analyzed the influence of macroeconomic and financial variables on the capitalization/GDP ratio during different phases of historical development in each country; and offered their estimates of the government economic policy effects on the movement of capitalization.

The study examines the capitalization/GDP ratio across 18 developed countries (Australia, Austria, Belgium, the UK, Germany, Denmark, Spain, Italy, Canada, the Netherlands, Norway, Portugal, the USA, Finland, France, Switzerland, Sweden, and Japan). As the factors influencing capitalization, 11 variables were applied: yields on government securities; inflation premiums; budget expenditure/GDP ratio; public debt/GDP ratio; inflation; share of rural population; share of people of retirement age; exports of goods as share of GDP; per capita income (constant 2011 US dollars); GDP per capita growth rate; the r-g differential.

As Alexander Abramov emphasized, the study that he presented differed from the previous research in that it demonstrated that the capitalization/GDP ratio followed a more complex movement pattern. Stable capitalization growth during the periods of sustainable development was achieved against the backdrop of sustained economic growth and low inflation. The main factor responsible for capitalization growth was net capital inflow; however, the role of the speculative factor increased over time, peaking in 1980–1999.

Among the factors that exerted a positive influence on capitalization growth over the course of every historical period, the speaker highlighted per capita GDP, stock market returns in real terms, and the declining share of rural residents in the total population. The government spending to GDP ratio and the yields on government securities had a negative impact on the capitalization movement patterns.

Factors like the public debt/GDP ratio, the index of economic openness, demographic burden, and GDP and inflation growth patterns over different historical periods displayed multidirectional effects on the movement of capitalization depending on the specific combinations of certain factors and conditions.

The current period of stock market development (2000–2020), according to Alexander Abramov, has been a transitional period characterized by an increasing role of the State and moderate growth of GDP and capitalization, the latter demonstrating a high volatility. An analysis of the points of view of different researchers testifies to their great uncertainty concerning the future trends in the stock market development and the possible exit from this period.

At the end of his presentation, the speaker emphasized that the study provided an understanding of the serious problem inherent in the current period (2000–2020) in the development of financial markets, in that it was a transitional one, characterized by an ever-increasing involvement of the State in the operation of market mechanisms, which was exercised primarily through the excessively soft monetary and fiscal policies. It identified the key macroeconomic and financial factors that the State could influence in order to control the stock market and capitalization growth; and provided a substantiation for the hypothesis of a more active reliance on the corporate dividend policies during the periods of transitional development.

Study presentation

Boris Rubtsov, Deputy Head of the Banking and Financial Markets Department of Financial University, made a co-report at the Academic Board’s meeting on the theme “Financial Markets and Economic Development”. He noted the exceptional scientific integrity of the authors in their handling of statistics. Mr. Rubtsov came to the conclusion that capitalization is the most important indicator of the financial market development level.

With due regard for the specific features displayed by capitalism models over different historical horizons, the co-report presented the models for three different eras (1880–1930; 1931–1970; 1970–2020) and for three periods of sustainable development within these eras (1880-1913; 1950-1969; 1980-1999). According to Boris Rubtsov, to build a model in order to assess the impact of some selective variables on capitalization over such a long period of time is not a very fruitful idea. Epochs and periods vary significantly, and so an analysis of the relationships between capitalization and different indicators outside of their historical context can yield distorted conclusions.

Report presentation

Candidate of Economic Sciences, Leading Researcher at the RANEPA Yuri Danilov presented a co-report on the long-term financial development trends and their determinants. He agreed with the researchers’ conclusion that the study was of a high practical significance for the Russian regulators, and said that in order to develop a competent economic policy in the financial sector, it is extremely important to get a proper understanding of the relevant factors and the ways of their influence on the key financial development indicators and the stock market parameters.

Report presentation