Economic Growth and Financial Development

There are three views about the sexual congress in the midst of sparing appendage and fiscal ripening. First, financial get alongment has mend on eco nary(prenominal)ic ontogenesis (i. e. Bagehot, 1873 Schumpeter, 1912 McKinnon, 1973 Shaw, 1973 Patrick, 1966 Goldsmith, 1969 Fry, 1973). Second, economic growth leads to financial training and that where there is economic growth financial learning follows (i. e. Robinson, 1952). The third view, however, contends that both financial development and economic growth Granger cause peerless an different.In the essay, our group focus on the first view which financial development ordaining has passive influence on economic growth. During the year from 1955 to 1993, legion(predicate) scholars has study the family relationship among financial development and economic growth. on with the time goes, the theory that financial development will truly elicit economic growth has been more and more prefect. In the years between 1950s and 1960s, economists such(prenominal) as Gurley and Shaw began to stress the credit markets and the importance of financial intermediaries, which they believed play an important role in economy. 5 They argued that tradition m maventary contagion mechanism ignores the factor of financial structure and financial flow and further pays attention to the total amount of money and the connection of the output. In 1955, Gurley and Shaw communicate up the development of financial institution is both a firm and determining variable in the growth process. (Gurley and Shaw, 1995, p. 532). Gurley and Shaw stressed that financial intermediaries keep influence on credit supply rather than money supply.In this way, financial intermediaries improve the efficiency of savings turning into investments and then affect the all economic activities. They are the earliest scholars to study in-depth the relationship between financial and economic development in developing countries. Gurley and S haw pointed out that the main memory access road of monetary insurance transmission probably have amused from money quantity, which is traditionally thought as the medium of exchange.Whereas, the financial susceptibility of economy would has a closer relationship with the gross expenditure. They put forrard financial development enhances the intermediation of loanable funds and therefore growth will be turned on(p) and they have a debt-intermediation view. The Debt-intermediation view establishes relations between pay and growth. First, economic growth would be associated with financial development, as remote indirect finance provides surplus units with the capacity to spend beyond their earnings.Second, growth would stimulate and be stimulated by the institutionalisation of saving and investment income grows, richer wealthiness-holders will increase their desire to diversify their asset portfolio. If financial innovation is such to accommodate this diversification demand, f inancial institutions can enhance their impart capacity and thus boost growth the process becomes a cycle. Gurley and Shaw has preferably pointed that the growing importance of NBFI (non-bank financial intermediaries) when they discussed their activities about potentially serious problems for monetary management and monetary policy. 1 Subsequent analysis of the problems had to two results. 2 First, if the monetary governing exerted control over the financial system through the operating of the financial markets, monetary management would not be undermined. 3 Second, which placed specific restrictions on banks, at that time the dominant financial entities, the growing role of NBFI was stimulated in part by the opportunities for intermediation created by monetary policy measures.These contributions stressed the relevance for financial deepening (mean financial development) of rising wealth and income, then attempts to control the activities of financial intermediaries. Wealth and i ncome incent the demand for financial services. Restrictions and Controls on financial intermediaries create the stimulation for further financial intermediation by generatingquasi-rents that risk among participants in financial and capital markets and reflect differences in information. 4 However, Gurley and Shaw do not address the issue of causality between financial development and economic growth. In 1966, Patrick make the causality issue is addressed, he be thestage of development hypothesis, where the direction of causality between financial development and economic growth changes over the course of development. 6 Two hypotheses are developed, one is Demand-following hypothesis a causal relationship from real to finance and the other is Supply-leading hypothesis a causal relationship from finance to growth.The supply-leading hypothesis supposes a causal relationship from financial development to economic growth, which means mature creation of financial institutions and market s increases the supply of financial services, and thus leads to real economic growth. Patrick suggests that initial development is spurred by supply-leading process, which gives way to demand-following process. He posed financial institutions and services emerge as demand for those services unfolds. The idea is that finance is passive in the growth process, but lack of financial institutions may prevent growth to occur.Financial institutions and their services precede the emergence of demand authorities support is needed to finance and nascent modern sector, such as subsidized loans, information to small business and long loan durations. He points out the importance of finance in economic growth. The difficulty of establishing the concern between financial development and economic growth was first place by Patrick (1966), he argued that a higher rate of financial growth is positively correlated with successful real growth. 7 In his theory, commercial banks may issue banknotes a nd accept easy collaterals. Easy loan can attain economic growth, for it can finance innovation-type investment, however, in fact it can overly induce irresponsible borrowing. Since the important work of Patrick, that first postulated a bi-directional relationship between financial development and economic growth. A large experiential literature has emerged testing this hypothesis as the Patricks (1966) problem remains inharmonic What is the cause and what is the effect? Is finance a leading sector in economic development, or does it simply follow growth in real output which is generated elsewhere. References 1 de Oliviera Campos, R. 1964) Economic ontogeny and Inflation with Special Reference to Latin America in Development Plans and Programmes Paris Organisation for Cooperation and Development 2 Duesenberry, J. S. and M. F. McPherson (1991) monetary Management in Sub-Saharan Africa HIID Development Discussion Papers no. 369, January 3 Friedman, M. (1973) Money and Economic D evelopment The Horowitz Lectures of 1972 New York Praeger Publishers 4 Malcolm F. McPherson and Tzvetana Rakovski (1999) Financial Deepening and enthronization in Africa Evidence from Botswana and Mauritius, Copyright 1999 Malcolm F.McPherson, Tzvetana Rakovski, and President and Fellows of Harvard College 5 Liu Pan Xie Tao (2006) The Monetary constitution Transmission in China-Credit Channel And Its Limitations, Working Papers of the worry Institute Berlin at the Berlin School of Economics (FHW-Berlin) 6 Anthony P. Wood and Roland C. Craigwell Financial Development and Economic Growth Testing Patricks Hypothesis for Three Caribbean Economies 7 Philip Arestis (2005) fiscal LIBERALISATION AND THE RELATIONSHIP BETWEEN FINANCE AND GROWTH, University of Cambridge