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

  • Morgan, Horatio M.
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    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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    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
    Date of revision:
    Handle: RePEc:pra:mprapa:49842
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    1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    2. 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.
    3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
    4. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    5. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Schleifer, Andrei & Vishny, Robert, 2001. "Investor Protection and Corporate Governance," Working Paper Series rwp01-017, Harvard University, John F. Kennedy School of Government.
    7. 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.
    8. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    9. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
      [The twin crises: Te causes of banking and balance of payments problems]
      ," MPRA Paper 13842, University Library of Munich, Germany.
    10. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
    11. Reinhart, Carmen & Kaminsky, Graciela, 1998. "Financial crises in Asia and Latin America: Then and now," MPRA Paper 13877, University Library of Munich, Germany.
    12. repec:oup:restud:v:64:y:1997:i:2:p:151-72 is not listed on IDEAS
    13. Daron Acemoglu & James A. Robinson, 2013. "Economics versus Politics: Pitfalls of Policy Advice," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 173-92, Spring.
    14. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "The Quality of Government," Working Paper 19452, Harvard University OpenScholar.
    15. Peter Blair Henry & Conrad Miller, 2009. "Institutions versus Policies: A Tale of Two Islands," American Economic Review, American Economic Association, vol. 99(2), pages 261-67, May.
    16. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2005. "Reaching out : access to and use of banking services across countries," Policy Research Working Paper Series 3754, The World Bank.
    17. 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.
    18. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
    19. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
    20. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    21. Thorsten Beck & Asli Demirgüç-Kunt, 2008. "Access to Finance: An Unfinished Agenda," World Bank Economic Review, World Bank Group, vol. 22(3), pages 383-396, November.
    22. Kirkpatrick, Colin & Tennant, David, 2002. "Responding to Financial Crisis: The Case of Jamaica," World Development, Elsevier, vol. 30(11), pages 1933-1950, November.
    23. 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.
    24. Sunday Iyare & Winston Moore, 2011. "Financial sector development and growth in small open economies," Applied Economics, Taylor & Francis Journals, vol. 43(10), pages 1289-1297.
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