Financial sector development, growth and poverty
Academic work assessing the link between financial sector development and the rate and nature of economic growth has quite a long empirical pedigree. It goes back to Yale’s Raymond Goldsmith, who assembled large quantities of data to test the correlation. Since then, advantaged by better and larger datasets, the field has become econometrically (and theoretically) more sophisticated, led by Ross Levine and a team of World Bank researchers but with a large group of other academics in the field. They have published prolifically. As a result it has become hard for the lay person to keep up with the flow of research.
Hence the recent DFID factsheet on FSD, growth and poverty reduction is a useful contribution—a four page summary of the issues, backed up by a longer paper by Karen Ellis. The headlines:
· Growth and financial sector development are closely correlated (no surprise: i.e. wealthy countries have deeper financial systems)
· FSD may in fact lead growth i.e. deeper and wider financial markets may cause higher subsequent growth rates.
Even more recent work (too late to make the DFID summary) goes further in finding evidence of links of FSD to poverty: in an Oct 2004 World Bank working paper, Beck, Demirguc-Kunt and Levine find that financial development is pro-poor. This result comes from econometric analysis of a cross country sample, in which financial intermediary development disproportionately boosts the income of the poor.
This is indeed a burgeoning field, not only in innovations in the field, but also in the more arcane halls of academic research.
