Finance and growth: Too much of a good thing?
Thorsten Beck, 27 October 2013
A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the downside risks can be beneficial.
Over the past 20 years, economists have accumulated a substantial body of empirical evidence that financial sector deepening is a critical part of the economic development process. This shows a well-functioning financial system is a conditio sine qua non for modern market economies to flourish.
Topics: International finance
Tags: economic growth, financial development
Migrating out of poverty: The role of finance
Meghana Ayyagari, Thorsten Beck, Mohammad Hoseini, 23 June 2013
Financial liberalisation has been controversial among academics and policymakers as it is not clear whom the benefits of expanded credit allocation accrue to. Using time and state-level variation across Indian states, this column finds strong evidence that financial deepening reduces rural poverty, especially among the self-employed. Financial deepening is also found to be associated with an inter-state migration trend from rural areas into the tertiary sector in urban areas.
For better or worse, the 2008 financial crisis has put the financial sector again at the centre of public debate. Several commentators have suggested that financial liberalisation contributed both to the financial crisis and to growing income inequality (e.g.
Topics: International finance
Tags: financial development, India
Interest groups and government capabilities matter for financial development
Eduardo Cavallo, Carlos Scartascini, 12 May 2012
For some commentators, the recent financial crises are a sign that financial development has gone too far. Yet there are still countries where such concerns are the stuff of dreams. This column focuses on why the level of financial development in poor countries remains so low and what policymakers can do about it.
The debate on the benefits and limits of financial development has come to the fore with the global financial crisis. The fact that the epicentre of the global financial crisis was in countries with developed credit markets has led some commentators to argue that financial development may have gone too far.
Topics: Development, International finance, Politics and economics
Tags: developing countries, emerging markets, financial development, institutions
Finance, long-run growth, and economic opportunity
Ross Levine, 25 October 2011
Financial systems support and spur economic growth. But does financial innovation foster financial development? While recent innovations have done damage, this column says the long-run story is that financial innovation is essential for economic growth.
Finance is powerful. The financial system can be an engine of economic prosperity – or a destructive cause of economic decline and misery.
Topics: Financial markets, International finance
Tags: economic growth, financial development, financial innovation
Sovereign defaults, banks and financial institutions
Nicola Gennaioli, Alberto Martin, Stefano Rossi, 17 November 2010
Recent sovereign defaults in developing countries have put severe strain on the defaulting country’s banking system. This column argues that these events teach us how the development of private financial markets plays a critical role in reducing the risk of government default and thus in supporting public borrowing.
Recent sovereign defaults highlight a close link between government default and financial sector turmoil, where banks often take centre stage. In the Russian default of 1998 the government's suspension of debt payments triggered large losses on the balance sheets of Russian banks, which had heavily invested in public bonds.
Topics: Global crisis, International finance
Tags: Debt crisis, default, financial development, Fiscal crisis
Can financial sector reform help bring informal firms into the formal sector?
Thorsten Beck, Chen Lin, Yue Ma, 13 October 2010
Can financial sector reform help bring informal firms into the formal sector? This column examines over 22,000 firms from 43 countries. Firms in countries with a credit registry are 20% less likely to evade taxes, and the tax evasion ratio in such countries is 11% lower.
While the global crisis has amply demonstrated the economic fragilities that a highly evolved financial sector can create, it is important not to “throw the baby out with the bath water”. The financial sector is critical to the economy. The important connection between financial development and growth is supported by a growing literature (Levine 2005).
Topics: Development, Taxation
Tags: financial development, informal sector, tax evasion, taxation
“Mother, can I trust the government?” Stable democracies are more likely to enjoy sustained financial development
Marc Quintyn , Geneviève Verdier, 23 September 2010
What do countries need for sustainable financial development? This column argues that protection of property rights is necessary but not sufficient. Using a sample of 160 countries from 1960 to 2005, it finds that checks and balances on power and political stability are the vital ingredients.
The epicentre of the global crisis can be traced to the world’s most developed financial systems, but few would consider this enough to challenge the broad consensus that financial development is good for economic growth.
Topics: Development, Financial markets, Politics and economics
Tags: democracy, financial development, institutions
The policy roots of finance
Giuseppe Bertola, Anna Lo Prete, 20 May 2010
Financial interconnectedness across countries has reached unprecedented levels – but what has driven this change? This column finds that financial deregulation is responsible for 16 percentage points of the increase in financial development, but openness to trade and the size of government off-set one another. This is because the structural association between trade openness and financial development is mildly negative.
Finance boomed for quite some time. And then it crashed. To understand what might happen as the world begins to emerge from the crisis, we need to try and understand where finance came from. At the global level, finance grew along with international economic integration at the turn of this century, as well as at the beginning of the 20th century.
Topics: Global economy, International finance
Tags: financial deregulation, financial development, openness
The crisis and the developing countries
Fabrizio Coricelli, 1 May 2010
Why have emerging economies weathered the crisis better than advanced countries? This column summarises a session given by Alan Winters, Saul Estrin, Thorsten Beck, and organised by Nauro Campos at the Royal Economic Society annual conference in March 2010. The contributions argue that the crisis may have long-lasting effects on migration, foreign direct investment, and financial development in Africa.
Economists and policymakers are still debating the causes of the global crisis and the prospects for recovery in the world economy (see the excellent column by Berkmen et al. 2010 on this site). But one point of agreement is that emerging economies have so far have weathered the crisis much better than advanced countries.
Topics: Development, Global crisis, International trade, Migration
Tags: Africa, developing countries, financial development, global crisis, migration
Who gets the credit? And does it matter? Household vs. firm lending across countries
Thorsten Beck, Berrak Buyukkarabacak, Felix Rioja, Neven Valev, 9 July 2009
How does financial development affect macroeconomic outcomes? Previous studies have relied on aggregate measures. This column introduces a data set that distinguishes between lending to enterprises and households and investigates the consequences for economic growth, income inequality, and consumption smoothing.
An extensive literature has documented the positive effect of financial development on economic growth and poverty reduction (Rajan and Zingales 1998; Beck, Levine and Loayza, 200
Topics: Development, Financial markets
Tags: credit constraints, enterprise credit, financial development, household credit, lending