IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

  • Zhuang, Juzhong

    (Asian Development Bank)

  • Gunatilake, Herath

    (Asian Development Bank)

  • Niimi, Yoko

    (Asian Development Bank)

  • Ehsan Khan, Muhammad

    (Asian Development Bank)

  • Jiang, Yi

    (Asian Development Bank)

  • Hasan, Rana

    (Asian Development Bank)

  • Khor, Niny

    (Asian Development Bank)

  • S. Lagman-Martin, Anneli

    (Asian Development Bank)

  • Bracey, Pamela

    (Asian Development Bank)

  • Huang, Biao

    (Asian Development Bank)

This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.adb.org/Documents/Working-Papers/2009/Economics-WP173.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Maria Susan M. Torres)


File Function: Full text
Download Restriction: no

Paper provided by Asian Development Bank in its series ADB Economics Working Paper Series with number 173.

as
in new window

Length: 44 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:ris:adbewp:0173
Contact details of provider: Postal: P.O. Box 789, Manila
Fax: (63-2) 636-2648
Web page: http://www.adb.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2008. "How Important Are Financing Constraints? The Role of Finance in the Business Environment," World Bank Economic Review, World Bank Group, vol. 22(3), pages 483-516, November.
  2. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2004. "Finance, Inequality, and Poverty: Cross-Country Evidence," NBER Working Papers 10979, National Bureau of Economic Research, Inc.
  3. James B. Ang & Warwick J. McKibbin, 2005. "Financial Liberalization, Financial Sector Development And Growth: Evidence From Malaysia," CAMA Working Papers 2005-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. 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.
  5. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  6. Thorsten Beck & Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2004. "Finance, Firm Size, and Growth," NBER Working Papers 10983, National Bureau of Economic Research, Inc.
  7. Demetriades, Panicos O. & Andrianova, Svetlana, 2005. "Sources and Effectiveness of Financial Development: What We Know and What We Need to Know," Working Paper Series RP2005/76, World Institute for Development Economic Research (UNU-WIDER).
  8. Dollar, David & Kraay, Aart, 2002. " Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
  9. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  10. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  11. Gine, Xavier & Townsend, Robert M., 2003. "Evaluation of financial liberalization : a general equilibrium model with constrained occupation choice," Policy Research Working Paper Series 3014, The World Bank.
  12. Galor, Oded & Tsiddon, Daniel, 1996. "Income Distribution and Growth: The Kuznets Hypothesis Revisited," Economica, London School of Economics and Political Science, vol. 63(250), pages S103-17, Suppl..
  13. Meyer Bittencourt, Manoel F., 2006. "Financial Development and Inequality: Brazil 1985-99," Proceedings of the German Development Economics Conference, Berlin 2006 5, Verein für Socialpolitik, Research Committee Development Economics.
  14. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  15. Besley, T., 1992. "How Do Market Failures Justify Interventions in Rural Credit Markets?," Papers 162, Princeton, Woodrow Wilson School - Development Studies.
  16. 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.
  17. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Department of Economics Working Papers 2008-07, Department of Economics, Williams College.
  18. Giovanni Favarra, 2003. "An Empirical Reassessment of the Relationship Between Finance and Growth," IMF Working Papers 03/123, International Monetary Fund.
  19. Beck, Thorsten & Levine, Ross, 2004. "Stock markets, banks, and growth: Panel evidence," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 423-442, March.
  20. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
  21. Beck, Thorstein & Lundberg, Mattias & Majnoni, Giovanni, 2001. "Financial intermediary development and growth volatility : do intermediaries dampen or magnify shocks?," Policy Research Working Paper Series 2707, The World Bank.
  22. Hasan, Rana & Magsombol, Maria Rhoda & Cain, J. Salcedo, 2009. "Poverty Impact of the Economic Slowdown in Developing Asia: Some Scenarios," ADB Economics Working Paper Series 153, Asian Development Bank.
  23. repec:ner:tilbur:urn:nbn:nl:ui:12-3125505 is not listed on IDEAS
  24. Anonymous, 2004. "The Importance Of Financial Sector Development For Growth And Poverty Reduction," Policy Division Working Papers 12886, Department for International Development (DFID) (UK).
  25. repec:ner:tilbur:urn:nbn:nl:ui:12-3508413 is not listed on IDEAS
  26. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
  27. Burgess, Robin & Pande, Rohini, 2004. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," CEPR Discussion Papers 4211, C.E.P.R. Discussion Papers.
  28. Datt, Gaurav & Ravallion, Martin, 1992. "Growth and redistribution components of changes in poverty measures : A decomposition with applications to Brazil and India in the 1980s," Journal of Development Economics, Elsevier, vol. 38(2), pages 275-295, April.
  29. George Clarke & Lixin Colin Xu & Heng-fu Zou, 2013. "Finance and Income Inequality: Test of Alternative Theories," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 493-510, November.
  30. Pascaline Dupas & Jonathan Robinson, 2013. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 163-92, January.
  31. Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
  32. James B. Ang, 2010. "Finance and Inequality: The Case of India," Southern Economic Journal, Southern Economic Association, vol. 76(3), pages 738-761, January.
  33. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  34. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  35. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
  36. repec:ner:tilbur:urn:nbn:nl:ui:12-3125520 is not listed on IDEAS
  37. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  38. repec:ner:tilbur:urn:nbn:nl:ui:12-3125506 is not listed on IDEAS
  39. Pablo Cotler & Christopher Woodruff, 2008. "The Impact of Short-Term Credit on Microenterprises: Evidence from the Fincomun-Bimbo Program in Mexico," Economic Development and Cultural Change, University of Chicago Press, vol. 56, pages 829-849.
  40. repec:ner:tilbur:urn:nbn:nl:ui:12-3125497 is not listed on IDEAS
  41. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
  42. Rajeev H. Dehejia & Roberta Gatti, 2002. "Child labor: The role of income variability and access to credit across countries," Discussion Papers 0102-69, Columbia University, Department of Economics.
  43. repec:ner:tilbur:urn:nbn:nl:ui:12-3125425 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ris:adbewp:0173. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Susan M. Torres)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.