We reexamine their assumptions, and the robustness of their results to alternative theories and interpretations. Fund, the london school of economics, and the participants at the american finance association meetings in atlanta, georgia, the conference on financial systems and crises at the yale school of. A model of endogenous growth that incorporates roles for both financial efficiency and access to financial services permits a better understanding of the relationship between the size of the financial sector value added and growth. This paper examines whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms throug. Does foreign direct investment accelerate economic growth. Theory and evidence on the financegrowth relationship munich. Finance is not even discussed in a collection of essays by the pioneers of development economicsmeier and seers 1984, including three nobel prize winners, and nobel laureate robert lucas 1988, p. The first argument builds on the theoretical and empirical finance and growth literature, as surveyed by levine 2005 and the importance of a welldeveloped financial system for economic development and poverty alleviation beck, demirguckunt and levine 2004 and honohan 2004a. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a.
For a broader recent discussion of the benefits, risks and politics of finance, see beck 2012. Beck, demirguckunt and levine 2003b and 2005 also show that legal system. Chapter 12 in handbook of economic growth, 2005, vol. Panel and crosssection studies demirguckunt and levine, 1996. Economic growth, financial development, and trade openness.
After resolving biases plaguing past work, we find that the exogenous component of fdi does not exert a robust, independent influence on growth. Finance and economics discussion series divisions of research. The econometrics of finance and growth springerlink. Aghion, howitt, and mayerfoulkes 2005 question whether financial development affects steadystate growth, and instead find that finance influences the rate of convergence. The the financial indicator in each of these regre ssions is the value of depth in 1960.
This paper uses new statistical techniques and two new databases to reassess the relationship between economic growth and fdi. Some studies find that both financial intermediaries and markets are important for economic growth boyd and smith 1998, levine and zervos 1998. Finance and balanced growth macroeconomic dynamics. Fourth, high wages in nance contribute signicantly to. Finance, firm size, and growth by thorsten beck, asli. The data are consistent with schumpeters view that the services provided by financial intermediaries stimulate longrun growth. Financial structure and growth bank for international. Users who downloaded this paper also downloaded these. While this chapter is concerned about estimating the relationship between finance and growth, some remarks about measuring financial development might be useful. There is a large research literature focused on various aspects of financial intermediation, but the.
Finance and growth schumpeter might be right robert g. Levine, loayza, and beck 2000 show that financial development fosters economic growth. Kneer, christiane 20b the absorption of talent into finance. Lucas 1988 holds that the role of finance in economic growth has been. Based on similar measures of legal systems used in the llsv studies, levine 1999 finds that the legal environment contributes to the growth of financial intermediation, which in turn stimulates the overall economic growth. Introduction economists disagree sharply about the role of the. Financial development, financial fragility, and growth. Evidence on finance and economic growth european central bank. Development research group is part of a larger effort in the group to understand the growth finance link.
Additionally, the paper analyzes the changes in the. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a simple ordinary least squares estimation. The firstgeneration studies see king and levine, 1993. The impact channels vary from additional financial funds, available to finance investment projects due to larger volumes of savings, to more efficient reallocation of funds, thus reaching the right entrepreneurs and leading to higher productivity see e. Financial dependence and growth revisited journal of the. This paper provides empirical evidence on whether financial development boosts the growth of small firms more than. Fdi and economic growth, the case of romania sciencedirect. Finance and growthlessons from the literature and the recent crisis. The quarterly journal of economics 108 3, 717737, 1993.
Booth chair in banking and finance at the university of california at berkeley. Theory and evidence ross levine nber working paper no. We revisit an earlier, highly influential paper on financial dependence and growth by rajan and zingales 1998. Financial market imperfections such as informational asymmetries. Higher financial value added results from some, but not all, kinds of financedriven growth. Some theories imply that financial development disproportionately fosters small firm growth.
Levine and zervos, 1998 used aggregate data to document that financial development affects economic growth on average. Investors are venturing into the worlds newest markets and some are seeing handsome returns. Levine, finance, entrepreneurship, growth by which the financial system may affect longrun growth, stressing that finan cial markets enable small savers to pool funds, that these markets allocate investment to the highest return. Panel estimations using quarterly data for the period 199520 are made for different groups of emerging countries, such as the full, f10, advanced, and secondary. Levine 1991 takes the diamond dybvig 1983 setup, models the. Economic growth, financial development, and trade openness in. A large finance and growth literature shows that finance is critical for growth. Finance, financial sector policies, and longrun growth. Evidence from us banking deregulation, dnb working paper 391. So, the financial progresseconomic growth relation signifies all actions undertaken by the abovementioned financial organizations and their association with the economic growth levine 2005. Vojislav maksimovic professor of finance, robert h smith school, university of maryland verified email at rhsmith. Further evidence on the link between finance and growth. Rajan and zingales financial dependence and growth. This is interpreted as the growth enhancing effect of financial development e.
Beck and levine, 2002, find that financial structure is irrelevant to economic. The paper uses the dynamic gmm model to examine the finance growth nexus with panel data 19812010 from 24 african countries. A positive impact of fdi on economic growth has been confirmed by a number of studies by researchers such as lunn 1980, schneider and frey, 2005 carkovic and levine, 2002. By providing a range of economic functions levine, 2005 via production of financial services and products, financial firms and markets contribute to economic growth and development. Firmlevel evidence oliver levine and missaka warusawitharana 201417 note. Fdi contributes to the economic growth through several channels. While this chapter is concerned about estimating the relationship between finance and growth, some remarks about measuring financial development might. Theory and evidence, handbook of economic growth, in.
Finance and economics discussion series divisions of. Theory and evidence ross levine department of economics, brown university and the nber, 64 waterman street, providence, ri 02912, usa email. Abstract using a unique firmlevel survey database covering 54 countries, we investigate the effect of financial, legal, and corruption problems on firms. Economists disagree sharply about the role of the financial sector in economic growth. Thus, financial development might primarily reflect changes in longrun growth opportunities whose mainsprings derive from other sources. Finance, firm size, and growth thorsten beck, asli demirguckunt, luc laeven and ross levine february 16, 2006 abstract. The level of a countrys financial development helps predict its rate of economic growth for the following 10 to 30 years. The authors examine whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth. Specifically, crosscountry studies king and levine 1993. Evidence suggests that there is a positive relationship between finance and economic growth and that there is a bidirectional causal relationship between finance and economic growth. Financial development disproportionately boosts incomes of the poorest quintile and reduces income inequality. This paper examines the longrun relationships of the growth model in 21 emerging countries and their alteration when countries in the considered panel vary. About 40% of the longrun impact of financial development on the income growth of the poorest quintile is the result of reductions in income inequality, while 60% is due to the impact of financial development on aggregate economic growth.
While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving. Brown university this lecture was prepared for the maxwell fry global finance lecture at birmingham business school on 14 september 2007. For a literature of the precrisis theoretical and empirical literature on finance and growth, see levine 2005. Ross levine born april 16, 1960 is an american economist who currently holds the willis h. Views and agenda article pdf available in journal of economic literature 352. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality. Levine 2005 provides the closest semblance of a professional consensus by admitting that we are far from definite answers to the question. He is also a senior fellow at the milken institute, a member of the council on foreign relations, and an advisor to the world economic forum.
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