The objective of this paper is to survey what is actually known about the finance-growth relationship based on theory and empirical work. We point out that traditional theoretical models linking financial development and economic growth do not pay sufficient attention to insights emerging from modern information economics. Markets with asymmetric information are not in general constrained Pareto efficient; and increased banking sector competition, following financial liberalization, will not necessarily induce efficient financial intermediation. Increased competition is likely to erode franchise values, which may, in turn, generate an unstable banking environment where gambling behaviour on the part of the banks is prevalent. Increased competition can also discourage relationship-banking, and it disturbs what may actually be a constrained efficient mode of contracting in a dynamic setting characterized by asymmetric information. We argue that these problems are further aggravated by the massive task of building an appropriate institutional and regulatory framework designed to effectively curb imprudent bank behaviour. Turning to the empirical evidence, it is shown that the alledged first-order effect whereby financial development causes growth is not adequately supported by econometric work. The empirical evidence on the finance-growth nexus does not yield any clear-cut picture. By way of conclusion, we question whether financial development, in the sense of increased formal financial sector intermediation in a deregulated environment can be expected to act as 'engine of growth' in the development process; and we argue in favour of a more cautious approach to financial sector reform. Copyright 漏 2003 John Wiley & Sons, Ltd.
Abstract:The latitude gradient in comparative development is a striking fact: as one moves away from the equator, economic activity rises. While this regularity is well known, it is not well understood. In the present paper we take a step towards unpacking this gradient. Perhaps the strongest correlate with (absolute) latitude is the intensity of ultraviolet radiation (UV-R), which epidemiological research has shown to be a cause of a wide range of diseases. We establish that UV-R is strongly and negatively correlated with economic activity, both across and within countries. We propose, and test, a mechanism that links UV-R to current income differences via the impact of disease ecology on the timing of the take-off to sustained growth.
The present paper examines a neglected determinant of aggregate productivity: temporary cross-border flows of people. We hypothesize that interaction between people from different nations facilitates the international diffusion of ideas, thus stimulating aggregate productivity. In order to assess the causal impact of people flows on productivity, we construct an instrument for people flows. By analogy to the trade/growth literature, this instrument is derived from a fitted gravity equation involving geographic determinants of bilateral travel flows. Our cross-section analysis reveal that greater international interaction leads to higher productivity; a very similar result, qualitatively as well as quantitatively, is obtained when we employ dynamic panel data methods for the purpose of identification.
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