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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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    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: https://mpra.ub.uni-muenchen.de/49842/1/MPRA_paper_49842.pdf
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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
    Handle: RePEc:pra:mprapa:49842
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    1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    2. Kaminsky, Graciela L & Reinhart, Carmen M, 1998. "Financial Crises in Asia and Latin America: Then and Now," American Economic Review, American Economic Association, vol. 88(2), pages 444-448, May.
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    4. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    5. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-279, April.
    7. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    8. Daron Acemoglu & James A. Robinson, 2013. "Economics versus Politics: Pitfalls of Policy Advice," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 173-192, Spring.
    9. 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.
    10. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
    11. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
    12. 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.
    13. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    14. 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.
    15. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    16. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 151-172.
    17. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    18. Kirkpatrick, Colin & Tennant, David, 2002. "Responding to Financial Crisis: The Case of Jamaica," World Development, Elsevier, vol. 30(11), pages 1933-1950, November.
    19. Peter Blair Henry & Conrad Miller, 2009. "Institutions versus Policies: A Tale of Two Islands," American Economic Review, American Economic Association, vol. 99(2), pages 261-267, May.
    20. 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.
    21. repec:hrv:faseco:30728041 is not listed on IDEAS
    22. Springer, Basil, 2010. "Barbados: public-private sector partnership," Documentos de Proyectos 285, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    23. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
    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.
    25. 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.
    26. repec:hrv:faseco:30747160 is not listed on IDEAS
    27. 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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