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Fifty Years of Finance and Development: Does Causation Matter?

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  • Peter Lawrence

    () (Keele University Department of Economics)

Abstract

This paper addresses the question of the necessity to find a causal relationship between financial development and growth and whether this relationship means anything at the macro level. Over the last 50 years the debate about this relationship has swung from an initial consensus that financial development follows, or is at least inter-related with growth, to an almost equally consensual belief that sustained economic growth follows from financial development. This paper argues that the relationship between financial development and economic growth is too complex to allow for such generalized assertions and that the evidence brought out in contemporary and historical research to support the newWashington-led consensus is seriously flawed. New research directions need to establish which financial policies work, especially at micro-level, and when, and to re-focus on the issue of production and the role finance can play in supporting productive investment.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0307.pdf
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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2003/07.

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Length: 30 pages
Date of creation: Nov 2003
Date of revision:
Publication status: Forthcoming in Journal of International Development, 2006
Handle: RePEc:kee:kerpuk:2003/07

Note: The work presented here derives from research into the effects of financial policy on household behaviour, funded by the United Kingdom’s Department for International Development (DFID), Social Science Research, under contract R7968. The views presented here are those of the author and not of DFID. This is a revised version of a paper presented to the DSA Economics, Finance and Development Study Group Conference on 50 years of Development Economics in July 2003.
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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Causation; development economics; financial development; growth Classification-J.E.L. Class O11; O16; O19;

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References

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  1. Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, vol. 106(435), pages 359-74, March.
  2. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633, September.
  3. Arestis, Philip & Demetriades, Panicos O, 1997. "Financial Development and Economic Growth: Assessing the Evidence," Economic Journal, Royal Economic Society, vol. 107(442), pages 783-99, May.
  4. Graff, Michael, 2002. "Causal Links between Financial Activity and Economic Growth: Empirical Evidence from a Cross-Country Analysis, 1970-1990," Bulletin of Economic Research, Wiley Blackwell, vol. 54(2), pages 119-33, April.
  5. Deidda, Luca & Fattouh, Bassam, 2002. "Non-linearity between finance and growth," Economics Letters, Elsevier, vol. 74(3), pages 339-345, February.
  6. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  7. Paul Wachtel & Peter Rousseau, 1994. "Financial Intermediation and Economic Growth: A Historical Comparison of the U.S., U.K. and Canada," Working Papers 94-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Peter Lawrence & Ibotombi Longjam, 2003. "Financial Liberalisation in India: measuring relative progress," Keele Economics Research Papers KERP 2003/08, Centre for Economic Research, Keele University.
  9. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  10. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  11. Odedokun, M. O., 1996. "Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs," Journal of Development Economics, Elsevier, vol. 50(1), pages 119-146, June.
  12. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
  13. Peter Lawrence, 2002. "Household Credit and Saving: Does Policy Matter?," Development and Comp Systems 0211001, EconWPA.
  14. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  15. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  16. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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Cited by:
  1. Peter Lawrence & Ibotombi Longjam, 2003. "Financial Liberalisation in India: measuring relative progress," Keele Economics Research Papers KERP 2003/08, Centre for Economic Research, Keele University.
  2. Malebogo Bakwena & Philip Bodman & Sandy Suardi, . "Making Abundant Natural Resources Work for Developing Economies: The Role of Financial Institutions," MRG Discussion Paper Series 2108, School of Economics, University of Queensland, Australia.

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