Abstract
The role of finance in the economic development is not something of a recent discovery and the literature on the importance of the financial system for economic growth is voluminous. Bagehot (1873), Schumpeter (1911), Robinson (1952) and Gurley and Shaw (1955), among others, have written on the subject of the relationship between financial development and economic development. Bagehot (1873) notes that the financial system played a critical role in igniting industrialization in England by mobilizing capital effectively and efficiently. Schumpeter (1911) asserts that there is a positive influence by the development of the financial sector on the level and rate of growth of a country's per capita income. This led to the belief by many development economists that the financial system has considerable importance for economic growth. Specifically, there seems to be a strong belief that lack of a developed financial system impedes economic development, and therefore policy makers should enact policies that encourage and strengthen the existence of a proper financial system. Some have taken a more neutral position and argue that like any other factors that serve as an ingredient for economic development, the development of the financial sector is not a necessary condition but can only fairly be ranked pari passu with other numerous inputs (Newlyn & Avramides, 1977). At the extreme other end, some have argued that the financial system has a minor role to play in the development of the general economy and merely enables the players in the private sector to ‘make’ and ‘lose’ money. This view, which is termed as the ‘casino hypothesis’1 of the financial system would simply mean that policy makers might easily ignore the need for strengthening such an institution.
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Notes
- 1.
Kitchen (1986) termed ‘casino hypothesis’ the views of a group that do not consider the financial sector as an important contributor to the general economic development.
- 2.
Goldsmith (1969) calculated FIR by taking the value of all financial instruments outstanding divided by the value of national wealth.
- 3.
Financial intermediation is the process where financial institutions act as a middle agent to transfer funds from savers to potential borrowers while providing both these groups of investors the opportunity to earn a return (Kitchen, 1986, p. 12).
- 4.
For detailed analysis and discussion of diversified views on this refer to Levine (1997).
- 5.
For analysis of other forms of government regulations that are common features of financial repression refer to Berthelemy and Varoudekis (1996a, p. 39).
- 6.
The author defines saving as Gross National Disposable Income (GNDI) less consumption expenditure, both measured at current prices.
- 7.
The sample countries though were regionally fully representative; they were taken from Asia, Latin America, Europe and G-7.
- 8.
This is also associated with decline in bank franchise value after financial liberalization. Demirguc-Kunt and Detragiache (1998) gives further analysis on this.
- 9.
Levine (1997) and Becivenga and Smith (1991) both give detailed analysis of this topic.
- 10.
‘Financial development’ and ‘financial intermediation’ are used interchangeably.
- 11.
Such experience includes Chilean as well as the recent East Asian crisis.
- 12.
An example of this is where financial markets can be classified into official and curb markets (informal market). This is not uncommon in most developing countries.
- 13.
The study uses a data set covering the period of 1956–1994.
- 14.
To allow comparison over time, these indices were constructed for 1987 and 1997 only.
- 15.
The following formula was used to calculate the index: \({{d_{ij}} = [({k_{ij}} - {\min _{i = 1...n}}\ {k_{ij}})/({\max _{i = 1....n}}\ {k_{ij}} - {\min _{i = 1...n}}\ {k_{ij}})]\times 100}\) where k is value of attributes and d is the measurement within a 0–100 scale of each attribute.
- 16.
This is mostly defined as the increase in the volume of financial capital stock to be intermediated by the financial sector or the increase in the degree of financial intermediation (mostly associated with more efficient use of capital).
- 17.
The countries taken for this study included Gambia, Kenya, Ghana, Zimbabwe and Nigeria.
- 18.
The Southern cone countries refer to Argentina (1997–1980), Chile (1975–1981) and Uruguay (1977–1982) where the period in bracket shows the period such high interest rates were experienced.
- 19.
This included Ghana, Kenya, Malawi, Rwanda, Nigeria, Cote d'Ivore, Madagascar, Sierra Leone and Mauritius.
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Ahmed, A.D., Islam, S.M.N. (2010). Literature Review. In: Financial Liberalization in Developing Countries. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2168-0_3
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