This is consistent with prior research showing that financial institutions provide the most important source of external finance in most developing countries e. But even if a more developed financial system is conducive to growth, this does not mean that more finance is always good. Some studies find that both financial intermediaries and markets are important for economic growth boyd and smith 1998, levine and zervos 1998. We examine the relationship between finance and economic growth in. Evidence on finance and economic growth european central bank.
Is financial innovation necessary for sustaining economic growth. Foreign banks, financial development, and economic growth. Interaction effects in the relationship between growth and. In particular, the securities industry grew from 0. Theory and evidence, handbook of economic growth, in. The econometrics of finance and growth springerlink. For a literature of the precrisis theoretical and empirical literature on finance and growth, see levine 2005. This paper uses new statistical techniques and two new databases to reassess the relationship between economic growth and fdi. Finance is not even discussed in a collection of essays by the pioneers of development economicsmeier and seers 1984, including three nobel prize winners, and nobel laureate robert lucas 1988, p. As levine 2005 emphasizes, the primary driver of the finance growth nexus is the allocation of capital. Thorsten beck and robert cull survey the state of small and mediumsized enterprise finance in subsaharan africa. The relationships among competition in the financial sector, access of firms to external financing, and associated economic growth are ambiguous in t we use cookies to enhance your experience on our website. Finance, firm size and growth by thorsten beck, asli. Despite the fact that the empirical financeandgrowth literature is now a quarter century old.
Joseph schumpeter argued in 1911 that the services provided by financial intermediaries mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions stimulate technological innovation and economic development. Theory and evidence, pp 865934 ross levine ch human capital and technology diffusion, pp 935966 jess benhabib and mark spiegel ch 14 growth strategies, pp 9671014 dani rodrik ch 15 national policies and economic growth. Levine r 2005 finance and growth theory and evidence school university of glasgow. Levine, finance, entrepreneurship, growth by which the financial system may affect longrun growth, stressing that finan cial markets enable small savers to pool funds, that these markets allocate investment to the highest return. Financial dependence and growth revisited journal of the. While past work shows that the level of nancial development is a good predictor of economic growth king and levine, 1993a, b. We also present evidence concerning the legal, regulatory, and policy determinants of nancial development. The channels through which financial development causes economic growth are productivity and capital accumulation beck, levine, and loayza 2000.
Maria carkovic and ross levine university of minnesota may, 2002 abstract. Financial innovation and endogenous growth harvard business. For a broader recent discussion of the benefits, risks and politics of finance, see beck 2012. Further evidence on the link between finance and growth. Levine 2005 defines financia l development as the financial system getting better at the functions outlined at the beginning of this section. The african financial development and financial inclusion gaps. We begin to survey those aspects of the literature on the financegrowth nexus which are not covered in orthodox surveys of the subject, such as levine 2005. Financial development disproportionately boosts incomes of the poorest quintile and reduces income inequality. By and large, the empirical evidence has demonstrated that there is a positive longrun association. Levine r 2005 finance and growth theory and evidence in. The growth of finance 7 the growth of the securities industry components of growth figure 1 shows that the growth of the securities industry accounts for almost half the overall 3 percentage point growth of the. Financial dependence, banking sector competition, and.
The experience of 10 subsaharan african countries revisited anthony enisan akinlo and tajudeen egbetunde abstract. Finance, firm size, and growth by thorsten beck, asli. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for. Financial intermediaries perform a number of functions. University of california, berkeley haas school of business. Development research group is part of a larger effort in the group to understand the growth finance link. Furthermore, theory and evidence imply that better developed financial systems ease. Bank credit and economic growth munich personal repec. This manuscript examines the link between bank lending and economic growth for european union eu27. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality. Levine r 2005 finance and growth theory and evidence in aghion p durlauf s eds.
Levine, ross 2008 although research shows that financial development accelerates aggregate economic growth, economists have not resolved conflicting theoretical predictions and ongoing policy disputes about the crossfirm distributional effects of financial. Finance, financial sector policies, and longrun growth. Economists disagree sharply about the role of the financial sector in economic growth. We revisit an earlier, highly influential paper on financial dependence and growth by rajan and zingales 1998. A reappraisal, pp 10151059 william easterly ch 16 growth and ideas, pp 10631111 charles jones. Does foreign direct investment accelerate economic growth. Various measures of the level of financial development are strongly associated with real per capita gdp growth, the rate of physical capital accumulation, and. Chapter 12 in handbook of economic growth, 2005, vol.
The paper was prepared as a background document for the growth commission. Interaction effects in the relationship between growth and finance the harvard community has made this article openly available. About 40% of the longrun impact of financial development on the income growth of the poorest quintile is the result of reductions in income inequality, while 60% is due to the impact of financial development on aggregate economic growth. Finance and the sources of growth thorsten beck, ross levine, and norman loayza june 1999 abstract. King and levine 1993a, 1993b, levine 1997, 2003, rajan and zingales 1998, levine et al. Various measures of the level of financial development are. We reexamine their assumptions, and the robustness of their results to alternative theories and interpretations. Assessment of the contribution of commercial banks to.
Senior research manager, finance and private sector, development research group, the. Introduction economists disagree sharply about the role of the. Kingand ross levine we present crosscountry evidence consistent with schumpeters view that the financial system can promote economic growth, using data on 80 countries over the 19601989 period. According to beck et al 2000, bekaert 2005, a long list of scholars posit, a causal association between finance and economic growth. Pdf foreign banks, financial development, and economic. Julan du, jie gan, li jin, sung wook joh, simon johnson, ross levine, lijun lin, anthony neoh, tom rawski, yihong xia, and seminarsession participants at the american economic association meetings, the asia. The theoretical framework of financial developmentgrowth nexus is strongly underpinned by growth theories namely the neoclassical model and endogenous growth theory which shall be further discussed next. All content in this area was uploaded by ross levine on aug 19, 2014. We present crosscountry evidence consistent with schumpeters view that the financial system can promote economic growth, using data on 80 countries over the 19601989 period. Financial inclusion and inclusive growth the world bank. The quarterly journal of economics 108 3, 717737, 1993. Law, finance, and economic growth in china sciencedirect. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a.
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