Financial Development & Economic Growth Essay

2451 words - 10 pages

Introduction"The question of growth is nothing new but a new disguise for an age old issue, one which has always intrigued and preoccupied economics: the present verses the future" (James Tobin)A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces (http://www.investorwords.com/5540/economic_growth.html)The role of financial sector in economic growth has always been a debatable topic. Today world's view is directed towards the concept of sustainable development and achieving higher living standards. Growth without development is highly criticized as temporary and a misleading indicator of the actual state of the economy. Concepts like population growth which disintegrate economic growth and education and health which improve human capital accumulation are gaining a lot of importance are being demonstrated as the key factors in the development of economy and it's GDP. Different critics and economist have different point of views and provided their own theories and research work to support them.Two key factors influence economic growth: technological change and capital accumulation. Technological change is the development of new goods and of better ways of producing goods and services. Capital accumulation is the growth of capital resources. Your parents are richer than your grand parents were when they were young. But are you going to be richer than your parents? And are your children going to be richer than you? The answer depends on the economic growth. (Michael Parkin p.43, 475)At one hand the group of economist strongly disagree with the fact that financial sector have any role to play in economic growth. The "pioneers of development economics" including Miers and Seers (1984) and Nobel Laureate Robert locus (988, P.6), have totally ignored finance as an "over stressed" determinant of economic growth. The famous argument by Joan Robinson (1952 p.86) "where enterprise leads finance follows", has totally removed finance from the list of factors that contributes to the economic growth, but instead it reacts to the changing demands of real sector.At the other hand the group of economists including Nobel laureate Merton Miller (1986) argues that financial market contributes to economic growth. A group of economist including Bhageot (1873), Schumpeter (1912), Gurley and Shaw(1955), Goldsmith(1969), Mckinon (1973) argue that ignoring finance as determinant of the economic growth is merely an interpretation of the limiting understanding of economical growth.The precedence given to the efficiency of economic growth is also bringing to focus on factors which interfere with its implementation and affect it badly. What distinguishes corruption from other indictors is essentially the fact...

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