A quick review of finance and growth

There was a time when I used to read a lot of this literature – Finance and Growth. It was mainly powered by Ross Levine of Brown University and you ended up reading quite a bit via the references he provides. Not anymore – one, these papers don’t include the crisis element and two, I just don’t get anytime. Most of the blogposts these days are referring only to some useful speeches (which i manage to read somehow).

John Lipsky of IMF in his new speech has given a useful review of Finance and Growth literature. What does research broadly imply? Three findings:

First, financial development is critical for both growth and development. There are few, if any, instances where the transition from a predominately agricultural economy through sustained and diversified growth has taken place without a well-functioning system of financial intermediation. While the details of national systems have varied, the broad principle has not.

Second, the presence of financial crises, even recurring crises, has not reversed the positive relationship between financial system development and economic growth.

And, third, financial crises and their impact can be suppressed completely only through severe financial sector repression and by autarkic policies—and at a clear cost to economic growth and development.

First and thrid points are ok. It is second point which needs to be expanded. The crises may not have reversed the relationship between fin system development and growth but has surely posed numerous question on the nature of financial development itself. There is still little clarity on what it means. Prior to the crisis all the fancy finance ideas were seen as advanced, sophisticated etc etc. We now know none of those words are true by a long way.

Addendum:

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