ECONOMICS

Financial & Economic Development

Financial & Economic Development

Introduction

Financial and economic development depends on the capability of the organization or the country to raise the rates of accumulation of physical and human capital. The financial intermediation generally sustains this savings process by increasing local and foreign savings for investment by different organizations; thus making sure that these finances are assigned for the most important use.

Economic and financial development also involves the creation and development of various institutions along with markets which maintain this savings and development process. Throughout the history the role of financial institutions has been to enhance the local savings into corporate investment, scrutinize and allocate investment funds and to check investment risks.

Financial and economic developments are the core areas of a strong and sovereign nation. The economic and financial development are inter dependent on each other in order to form a positive outlook of the resource allocation and utilization of a nation. However, researches and evidences obtained from different countries reveals diverse scenarios and varying results concerning the relationship between financial and economic development.

There is a lack of consensus regarding the actual relationship between the two variables and the direction of their relationship. Several researchers have proved their evidences through the help of past researches, models and theories in economics and finance subject areas. The basic idea remains the same that the progression in an economy and the qualitative measurement of the progress is referred to as the economic development of a country, whereas, the financial development is associated with the financial deepening and financial widening of the financial sector in an economy. This paper discusses the relationship among the financial and economic development variables. It attempts to analyze the reasons behind the possible directions of relationship between these two variables through empirical evidences.

Discussion

Relationship between the Financial Development and Economic Development

Large number of financial organizations has strong externalities that are usually positive. These externalities can also be negative in some of the cases which are prevalent in overall economic systems.

The debate over the relationship between the financial development and economic development is increased for last few decades, especially after the work of King and Levine (1993, pp. 513-542). In this work the financial intermediaries fueled the capital accumulation and productivity growth factors, hence economic growth. It had also been shown by Levine (1997, pp. 688 -726) that the risk management is improved by the financial intermediaries and it also brings an ease in the financial transactions, ease of trade in services and goods and mobilization of savings. Ang (2008, pp. 38-53) also pointed out that an efficient fanatical system positively effects the economic growth. Subsequent to the development on the endogenous growth in early 90s, new approaches which support the interest of financial liberalization have been raised to recognize the relationship between economic growth and the financial liberalization. The work of Ang (2008, pp. 38-53) seeks to justify the execution of financial liberalization and concluded that in order to ensure the proper functioning of a financial system, ...