Financial liberalization, financial development and economic growth in LDCs

By Thomas Barnebeck Andersen, F. Tarp. 2003

288 citations recorded by the source corpus.

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 © 2003 John Wiley & Sons, Ltd.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/5ca7c4ee86245cb6f6829b4f218ebcd050767ddc

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Citations in the corpus

Determinants of the link between financial and economic development: Evidence from a functional coefficient model (2014, background): “However, there are also studies w development which leads to financial development (Ang tion, a few studies have diagnosed a negligible impact of ment (Andersen and Tarp, 2003).”
How do financial globalization, institutions and economic growth impact financial sector development in European countries? (2020, background): “2000, Andersen and Tarp, 2003). Thus, financial globalization may result in instability rather efficiency in banking sector. Finally, Stiglitz (2000) argued that capital inflows following financial globalization is of speculative nature and may not be a mode of long-term investment.”
Financial sector development and economic growth: evidence from Cameroon (2017, background): “…Least Square (OLS) regression techniques Negative impact (when stock market development is proxied by market capitalization and value traded ratios) Andersen and Tarp (2003) 74 countries Panel GMM regression No impact Ram (1999) 95 countries Multiple-growth regression model No impact Source:…”
Is Islamic Banking Good for Growth? (2015, unknown): “…Loayza, and Beck, 2000), although some more recent studies—especially since the global financial crisis--cast doubt on the strength of the positive relationship between financial development and growth (see for instance Andersen and Tarp, 2003, Arcand, Berkes and Panizza, 2012 and Panizza, 2014).”
Financial development, ICT diffusion and economic growth: Lessons from MENA region (2013, result): “On the contrary, other studies like Gregorio and Guidotti (1992), Fernandez and Galetovic (1994), Ram (1999), Andersen and Tarp (2003), Favara (2003) and Ben Naceur and Ghazouani (2007) suggest that the relationship between the financial development and growth can be less general than the…”
Same Financial Development yet Different Economic Growth--Why? (2006, background): “In this regard, comprehensive surveys have been provided by Pagano (1993), Levine (1997), Wachtel (2003), Driffill (2003), and Andersen and Tarp (2003).1 True that most studies confirm the existence of a positive nexus, but counterevidence also exists.”
Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries (2018, methodology): “Andersen and Tarp (2003) using a data-set of least developed countries (LDCs) on financial liberalization, financial development and economic growth, concluded as “we agree that a well-functioning financial system can play a vital role in the process of economic growth; we fully recognize that…”
Financial Development and Poverty Reduction: Can There be a Benefit without a Cost? (2008, background): “The relationship between financial development and instability may be explained by a number of factors (for a survey, see Andersen and Tarp, 2003); it is the main reason why some authors cast theoretical as well as empirical doubt on the beneficial effect of financial development on growth…”