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Financial Development and Economic Growth: New Lessons from Small Open Economies

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  • Morgan, Horatio M.
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    Abstract

    This paper develops a political economy framework to explain the underlying financial mechanisms through which redistributive policies may affect both the relative level of per capita income growth rates, and the relative stability of growth paths across countries. It proposes that socio-politically motivated redistributive policies characterized by financial exclusion may undermine financial intermediation. By extension, it argues that politically unconnected productive firms may face binding financial constraints in normal times, and both politically connected and unconnected firms may jointly face binding financial constraints in abnormal times. This may give rise to an output gap in normal times that diverges in abnormal times. It is shown that this theoretical framework can explain growth disparities between Jamaica and Barbados since the 1960s. In addition, it offers new lessons on the importance of effective long-run pro-poor-pro-growth strategies for developing countries with acute income inequality.

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    File URL: http://mpra.ub.uni-muenchen.de/49842/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49842.

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    Date of creation: 12 Sep 2013
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    Handle: RePEc:pra:mprapa:49842

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    Keywords: Barbados; Economic growth; Financial development; Institutions; Jamaica; Politics; Redistributive policies;

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    1. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
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    7. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    8. Kamal Banskota & Stanley R. Johnson & Gary Stampley, 1987. "Income Distribution in Jamaica," Food and Agricultural Policy Research Institute (FAPRI) Publications 87-sr36, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
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    19. Kamal Banskota & Stanley R. Johnson & Gary Stampley, 1987. "Income Distribution in Jamaica," Center for Agricultural and Rural Development (CARD) Publications 87-sr36, Center for Agricultural and Rural Development (CARD) at Iowa State University.
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    21. M.O. Odedokun, 1998. "Financial intermediation and economic growth in developing countries," Journal of Economic Studies, Emerald Group Publishing, vol. 25(3), pages 203-224, September.
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    23. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
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