Literature Survey on Finance & Growth

A team of ADB economists (10 in all) have written an exhaustive literature survey on following issues:

  • Whether finance leads to economic development or vice versa?
  • Whether economic growth leads to reduction in poverty?
  • Whether financial development leads to reduction in poverty?

 The authors cite many studies which have looked at these issues differently and have arrived at same/different conclusions.

Broad lessons:

  • First, there is now a consensus that financial sector development plays a vital role in facilitating economic growth.
  • Second, there is also a consensus that financial sector development contributes to poverty reduction, and a major channel is through economic growth.
  • Third, it is widely agreed that financial sector development also directly supports poverty reduction by broadening the access to finance of the poor and vulnerable groups.
  • Fourth, while the role of financial sector development in facilitating growth and supporting poverty reduction is largely accepted, there are disagreements over the relative importance of banks and capital markets in financial sector development in low-income countries
  • Fifth, microfinance and SME credit programs are considered as effective instruments to improve poor households’ economic and social welfare and reduce poverty, largely based on earlier case studies. 
  • Sixth, case studies designed to evaluate the effectiveness of development assistance to the financial sector in developing countries find that in general, such assistance has been effective in supporting the development of financial regulatory frameworks and market infrastructures, developing missing or incomplete markets.
  • Finally, while an effectively functioning financial system is important for economic growth and poverty reduction, finance also brings risks. Therefore, the issue is how to develop a financial system that supports economic growth and poverty reduction in the context of financial stability, and how to balance the need for financial sector development and innovation with the need for economic and financial stability.

Hmmm..  All these are pretty much known by most. Just that this paper serves as a neat literature survey and covers many papers. So saves a lot of time as well.

But you know, I don’t really understand the need to look at questions like whether finance leads to growth or growth leads to finance. When I started this blog, I used to think these kinds of papers/questions very useful and quite a few initial blogposts looked at papers on these issues. However, after much more reading my thinking has changed.

I understand they are useful, but they treat an economy to be too simple. If you have financial systems in place, it would lead to growth and vice versa. The reality is it is economics is all too complex. There are many things needed for economic growth and finance is one of them. Same is the case with poverty and growth. We all would love to have one or couple of factors that lead to growth or poverty reduction, but it is just too complicated. Difficult for any research project no matter how elaborate the research project is. The quest for holy grail would always continue.

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8 Responses to “Literature Survey on Finance & Growth”

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