Fifty Years of Finance and Development: Does Causation Matter?

Peter Lawrence ()

No KERP 2003/07, Keele Economics Research Papers from Centre for Economic Research, Keele University

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 newWashington-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.

Keywords: Causation; development economics; financial development; growth Classification-J.E.L. Class O11; O16; O19 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2003-11
Note: The work presented here derives from research into the effects of financial policy on household behaviour, funded by the United Kingdom’s Department for International Development (DFID), Social Science Research, under contract R7968. The views presented here are those of the author and not of DFID. This is a revised version of a paper presented to the DSA Economics, Finance and Development Study Group Conference on 50 years of Development Economics in July 2003.
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Forthcoming in Journal of International Development, 2006

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