SOAS Research Online

Abstract

This paper aims to survey existing research on financial development and economic growth, highlighting the theoretical models and evidence from recent empirical work. Emphasis is placed on the flow-of-funds story (finance matters for economic growth). It is noted that recent evidence is weighted in favour of the argument that financial development, in terms of financial institutions and markets and their role in reducing information asymmetry and pricing risk, is crucial for economic growth. Also, new evidence offers important insights into the mechanisms by which finance induces economic growth, including emerging work on corporate finance as well as work that teases out an implication for inter-generational income distribution and poverty reduction (the finance-and-growth opportunity argument). However, there are some cautionary tales, as well, not least because of financial crises and contagion effects and the threat to sustainable growth and income convergence. Evidence specific to African economies is highlighted and implications for policy are drawn. The paper concludes by proposing the way forward for further research.