Fifty Years of Finance and Development: Does Causation Matter?

From:: Department for International Development
Published: 1 January 2003

Document Type:: Research Paper
Theme:: Social Change
Authors:: Lawrence, P.

Abstract

This paper addresses the question of the necessity to find a causal relationship between financial development and growth and whether this relationship means anything at the macro level. Over the last 50 years the debate about this relationship has swung from an initial consensus that financial development follows, or is at least inter-related with growth, to an almost equally consensual belief that sustained economic growth follows from financial development. This paper argues that the relationship between financial development and economic growth is too complex to allow for such generalized assertions and that the evidence brought out in contemporary and historical research to support the new Washington-led consensus is seriously flawed. New research directions need to establish which financial policies work, especially at micro-level, and when, and to re-focus on the issue of production and the role finance can play in supporting productive investment.

Citation

Keele Economics Research Papers, KERP 2003/07, 33 pp.