Sources and Effectiveness of Financial Development: What We Know and What We Need to Know

Abstract

Drawing on recent literature, the paper argues that institutions and political economy factors hold the key to understanding why some countries have succeeded in developing their financial systems while others have not. The paper also reviews new evidence which suggests that institutional quality may influence the effectiveness of financial development in delivering economic growth. These new findings highlight the possibility that poor countries may be stuck in a bad equilibrium, in which weak institutions inhibit growth both directly and indirectly, through under-developed, lowquality finance. In addition, the paper identifies a number of unanswered questions in the financial development literature, including the precise role of important institutions like law in finance, and the influence of geographical factors.

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

“…Hundreds of scholarly papers have been written to conceptualize how the development and structure of an economy's financial sector affect domestic savings, capital accumulation, technological innovation, and income growth, or vice versa; and to empirically test these linkages including identifying directions of the causality and their relative importance using cross-country; country-specific; and industry-, firm-, and project-level data. Several authors have surveyed this large literature (see, for example, Honohan 2004aHonohan , 2004bDFID 2004;Levine 2004;and Andrianova and Demetriades 2008).…”

Financial inclusion, economic growth, and poverty alleviation: evidence from eastern Indonesia

“…Over time, the position of the financial sector related to economic growth became one of the topics that was widely researched. Many hypotheses were formed to determine the development in accordance with domestic savings, capital accumulation, technological innovation, income growth, and financial determination (Levine et al, 2000;Honohan, 2004;DFID, 2004;Levine, 2004;and Andrianova & Demetriades, 2008). Nevertheless, the development context in the financial sector is expected to lead to "financial inclusion" conditions, which are considered by Kim et al (2018) as: "...ease of accessibility and availability of the formal financial services, such as bank deposit, credits, insurance, etc., for all participants in an economy.…”

An Officious Impact of Financial Innovations and ICT on Economic Evolution in China: Revealing the Substantial Role of BRI

“…A well-functioning financial sector, a larger range of expanded financial instruments, and product diversity are not possible without contributing to innovative technologies. Andrianova and Demetriades [6] claimed that the advent of novel financial assets and resources in the financial system boosts the efficiency of the banking sector and the creation of capital markets, ultimately boosting economic growth in the host country. Hence, revealing the role of financial innovations for the economy of China becomes indispensable.…”