Financial Development and Economic Growth
In Corporatist and Liberal Market Economics
Abstract
The paper describes tests of hypotheses from economic history and theory concerning the significance of financial development
as a possible determinant of economic growth. The empirical
analysis is based on a large panel data set covering 93 countries
from 1970-90. It goes beyond existing studies by drawing on a new
proxy for financial development that refers to the input of real
resources into the financial systems. Moreover, interaction effects
between financial development and catching-up as well as education are
considered. It is shown that, according to our data, during the 1970s and
1980s, finance may well have been a determinant of growth. Finally,
to clarify whether socio-economic characteristics possibly modify the
general structure of the finance-growth nexus, the countries in our
sample are classified according to their degree of corporatism. The
resulting ranking is used to split the sample into a more and a less
corporatist subgroup. It is shown that the generally positive partial
correlation's between (lagged) proxies for financial development as well
as its interaction terms and growth are significantly higher in the more
corporatist subgroup of countries. It is therefore crucial to study
the embeddedness of economic institutions like the financial sector into
its broader social, cultural and historical surroundings.