the interest group theory of financial development in china openness and the role of interest groups the interest group theory of financial development predicts that the incumbents opposition to financial development will be weaker when an economy is open to both trade and capital flows based on regressions of financial development on trade and financial openness existing studies only provide indirect tests of the hypothesis and deliver mixed findings this paper proposes models for direct tests of interest group theory for china using chinese cross province data we define and measure interest groups based on the close tie between state owned enterprises and local government in china the empirical results show that the opposition from interest groups to financial development cannot be weakened in provinces with high trade or financial openness alone however the opposition is indeed weakened in provinces with high levels of both trade and financial openness these results provide robust support for interest group theory in accounting for cross province differences and time series variation in financial development in china

finance and the sources of growth at various stages of economic development this article studies the effects of financial development on the sources of growth in different groups of countries recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries this hypothesis is tested with panel data from 74 countries using gmm dynamic panel techniques results are consistent with the hypothesis finance has a strong positive influence on productivity growth primarily in more developed economies in less developed economies the effect of finance on output growth occurs primarily through capital accumulation jel o4 g1

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

the financial development and growth nexus a meta analysis this is the accepted manuscript the final version is available from wiley at http onlinelibrary wiley com doi 10 1111 joes 12086 abstract

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

financial intermediation capital composition and income stagnation the case of europe abstract we look into the role of financial intermediation in inducing the european financial crisis of 2008 by exploring the effects of overall lending and the allocation of credit to specific categories of borrowers namely households vs firms we find that for the eu26 during the period 1995 2008 excessive household leverage through mortgage lending exerted a crowding out effect on availability of credit to support innovation and productive investment the crowding out effect ultimately translated into a gdp growth that was decoupled from real household income in this article we explain that shifting credit towards mortgages and away from corporate projects is consistent with rational behaviour based on historical trends aimed at minimizing short term risk for each individual bank nevertheless as a whole the sum of individual risk reducing attitudes generated a long term systemic risk

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

is the relationship between financial development and economic growth monotonic evidence from a sample of middle income countries summary we revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980 2008 period using pooled mean group estimations in a dynamic heterogeneous panel setting we show that there is an inverted u shaped relationship between finance and growth in the long run in the short run the relationship is insignificant this suggests that too much finance can exert a negative influence on growth in middle income countries the finding of a non monotonic effect of financial development on growth is confirmed by estimating a threshold model

does financial reform raise or reduce saving the effect of financial liberalization on private saving is theoretically ambiguous not only because the link between interest rate levels and saving is itself ambiguous but also because financial liberalization is a multidimensional and phased process sometimes involving reversals using principal components we construct 25 year time series indices of financial liberalization for each of eight developing countries chile ghana indonesia korea malaysia mexico turkey and zimbabwe these are employed in an econometric analysis of private saving in these countries our results cannot offer support for the hypothesis that financial liberalization will increase saving on the contrary the indications are that liberalization overall and in particular those elements that relax liquidity constraints may be associated with a fall in saving

impact of copula choice on the modeling of crop yield basis risk a number of problems in agricultural economics involve modeling joint distributions for which the assumption of multivariate normality may not be warranted yet very little work has been conducted evaluating competing methods for modeling joint dependence we develop a simulation framework to evaluate the bias and efficiency impacts of copula choice in the context of evaluating county to farm basis risk the results suggest significant differences in performance across various copulas and approaches the findings have important implications for risk analysis insurance and policy modeling problems in agriculture regarding the selection of method to model dependence among random variables

welfare gains from financial liberalization financial liberalization has been a controversial issue as empirical evidence for growth enhancing effects is mixed here we find sizable welfare gains from liberalization cost to repression though the gain in economic growth is ambiguous we take the view that financial liberalization is a government policy that alters the path of financial deepening while financial deepening is endogenously chosen by agents given a policy and occurs in transition towards a distant steady state this history dependent view necessitates the use of simulation analysis based on a growth model our application is a specific episode thailand from 1976 to 1996

financial intermediation and economic performance historical evidence from five industrialized countries this paper examines the nature of links between the intensity of financial intermediation and economic performance that operated in the united states the united kingdom canada norway and sweden over the 1870 1929 period after describing the coevolution of the financial and real sectors in these countries vector error correction models vecms establish the quantitative importance of long run relationships among measures of financial intensity and real per capita levels of output and the monetary base granger causality tests then suggest a leading role for the intermediation variables in real sector activity while feedback effects are largely insignificant the results suggest an important role for intermediation in the rapid industrial transformations of all five countries

the determinants of financing obstacles the authors use survey data on a sample of over 10 000 firms from 80 countries to assess 1 how successful a priori classifications are in distinguishing between financially constrained and unconstrained firms and 2 more generally the determinants of financing obstacles of firms they find that older larger and foreign owned firms report less financing obstacles their findings thus confirm the usefulness of size age and ownership as a priori classifications of financing constraints while they shed doubts on other classifications used in the literature their results also suggest that institutional development is the most important country characteristic explaining cross country variation in firms financing obstacles

financial intermediation business failures and real business cycles in this paper a general equilibrium business cycle model is construct ed that when subjected to real disturbances mimics observed qualita tive comovements among real output money business failures risk pr emia intermediary loans and prices in contrast monetary disturban ces generate cycles that have several inconsistencies with empirical evidence thus providing support for real business cycle theory at th e expense of monetary theories of the business cycle financial inter mediation arises endogenously in the model and intermediation matters for business cycle behavior a credit supply mechanism acts in tande m with an intertemporal substitution effect in propagating stochastic disturbances copyright 1987 by university of chicago press

reaching out access to and use of banking services across countries the authors 1 present new indicators of banking sector penetration across 99 countries based on a survey of bank regulatory authorities 2 show that these indicators predict household and firm use of banking services 3 explore the association between the outreach indicators and measures of financial institutional and infrastructure development across countries and 4 relate these banking outreach indicators to measures of firms financing constraints in particular they find that greater outreach is correlated with standard measures of financial development as well as with economic activity controlling for these factors the authors find that better communication and transport infrastructure and better governance are also associated with greater outreach government ownership of financial institutions translates into lower access while more concentrated banking systems are associated with greater outreach finally firms in countries with higher branch and atm penetration and higher use of loan services report lower financing obstacles thus linking banking sector outreach to the alleviation of firms financing constraints

financial development and long run growth is the cross sectional evidence robust in a seminal paper levine loayza and beck llb 2000 provide cross sectional evidence showing that financial development has positive average impact on long run growth using a sample of 71 countries we argue that the evidence is sensitive to the presence of outliers

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

the legal environment banks and long run economic growth this paper examines the relationship between the legal system and banlding development and traces this connection through to long run rates of per capita gdp growth capital stock growth and productivity growth the data indicate that countries where the legal system 1 emphasizes creditor rights and 2 rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax furtherrnore the exogenous component of banking development the component defined by the legal environment is positively and robustly associated with per capita growth physical capital accumulation and productivity growth this paper addresses two questions first do crosscountry differences in the legal rights of creditors the efficiency of contract enforcement and the origin of the legal system explain cross country differences in the level of banking development second do better developed banks cause faster economic development that is is the component of banking development defined by the legal environment positively associated with long run rates of economic growth capital accumulation and productivity growth examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long run growth first banks may influence the level of income per capita and the magnitude of cyclical fluctuations bernanke and gertler 1989 1990 second many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development north 1981 engerman and sokoloff 1996 consequently quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development furthermore examining the causal links between banks and economic growth has both conceptual and policy implications on the conceptual front a long literature debates the importance of banks in economic development starting as early as bagehot 1873 economists have argued that better banks banks that are better at identifying creditworthy firms mobilizing savings pooling risks and facilitating transactions

manufacturing growth and financial development evidence from oecd countries recent theoretical models conjecture that the development of the financial sector is essential for economic growth we investigate this hypothesis from a time series perspective and find that financial sector gdp is cointegrated for many oecd countries not so much with manufacturing gdp but mostly with manufacturing total factor productivity moreover this relation is in some instances characterized by long run causality in the sense of granger and lin however even within this homogeneous group of countries the variety of results suggests a more complex picture than is apparent from cross sectional evidence

bank competition and access to finance international evidence using a unique database for 74 countries and for firms of small medium and large size we assess the effect of banking market structure on the access of firms to bank finance we find that bank concentration increases obstacles to obtaining finance but only in countries with low levels of economic and institutional development a larger share of foreign owned banks and an efficient credit registry dampen the effect of concentration on financing obstacles while the effect is exacerbated by more restrictions on banks activities more government interference in the banking sector and a larger share of government owned banks

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

access to finance an unfinished agenda recent data compilations show that many poor and non poor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality an extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation there is less evidence at the household level however and on the effectiveness of policies to overcome financial exclusion the article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda

macroprudential policy and bank risk abstract this paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies there are three main findings first there is evidence suggesting that macroprudential tools have a significant impact on bank risk second the responses to changes in macroprudential tools differ among banks depending on their specific balance sheet characteristics in particular banks that are small weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools third controlling for bank specific characteristics macroprudential policies are more effective in a tightening than in an easing episode

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

what causes violent crime this study uses panel data of intentional homicide and robbery rates for a sample of developed and developing countries for the period 1970 1994 based on information from the united nations world crime surveys to analyze the determinants of national crime rates both across countries and over time a simple model of the incentives to commit crimes is proposed which explicitly considers possible causes of the persistence of crime over time criminal inertia a panel data based gmm methodology is used to estimate a dynamic model of national crime rates this estimator controls for unobserved country speci ce ects the joint endogeneity of some of the explanatory variables and the existence of some types of measurement errors a icting the crime data the results showthat increases in income inequality raise crime rates crime tends to be countercyclical and criminal inertia is signi cant 2002 elsevier science b v all rights reserved

energy consumption and gdp revisited a panel analysis of developed and developing countries this paper applies a new panel data stationarity testing procedure first developed by carrion i silvestre et al 2005 econometrics journal 8 159 175 with panel vars that employ the generalized method of moment techniques in order to re investigate the dynamic interactions between energy consumption per capita lec and real gdp per capita lry in 22 developed and 18 developing countries when multiple breaks in the series are taken into account there is convincing evidence of panel stationarity for lec and lry in both groups the energy crises evidently had a substantive impact on both lec and lry in all sample countries furthermore our panel vars attest to bidirectional causality between lec and lry in developed countries but there is uni directional causality from lry to lec in developing countries finally from the orthogonalized impulse response functions all of the variables in the panel vars have a positive effect on each other but their impact is greater and more persistent in developing countries some important policy implications do emerge

why countries differ in thin capitalization rules the role of financial development abstract the purpose of thin capitalization rules is to limit multinational firms possibilities of engaging in tax planning via debt shifting this paper analyzes the optimal design of thin capitalization rules in the presence of financial frictions when a host country in the first stage chooses the type of thin capitalization rule and then in the second stage decides about the strictness we show that welfare under a safe haven rule is higher than under an earnings stripping rule if firms are not able to manipulate the interest rate on internal loans welfare however can be higher under an earnings stripping rule if firms are able to manipulate the interest rate on internal loans we also show that the optimal level of internal interest deductions decreases with the financial development of the host country our results are consistent with countries actual policy choice

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

is full banking integration desirable abstract we analyze the links between banking integration and economic development for a sample of oecd countries we measure banking integration considering indicators that merge not only openness but also connectedness with other banking systems we plug these indicators into income regressions also controlling for other relevant variables considered by the literature in contrast to previous initiatives this second stage explicitly takes into account the differing levels of economic development of the countries in our sample since the benefits of enhanced banking integration might not be generalizable to this end we implement quantile regression also considering the presence of endogenous regressors results show that bank connectedness is more important for economic development than bank openness but the combined effect i e banking integration overall is positive and significant the quantile regression models used in the second stage show that the effects are stronger for the poorest economies

the interest group theory of financial development evidence from regulation abstract we use a new dataset of de jure measures of trade capital account product market and domestic financial regulation for 91 countries from 1973 to 2005 to test rajan and zingales s 2003 interest group theory of financial development in line with the theory we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization this result is robust to the use of different data frequencies annual 5 year intervals estimation methods ols 2sls system gmm and a check for non linear effects however in contrast to the theory we do not find consistent evidence of an effect of capital account liberalization

the real effect of banking crises finance or asset allocation effects some international evidence abstract this paper analyzes whether the decline in economic growth that follows a banking crisis occurs because of a reduction in the amount of credit available finance effect or a worsening in the allocation of investable resources asset allocation effect we use a sample of more than 2500 industrial firms in 18 developed and developing countries that experienced 19 systemic banking crises between 1989 and 2007 the results indicate that banking crises negatively affect firms intangible investments which intensifies the economic downturn the negative growth effect produced by the worsening of the investment allocation is stronger in countries with highly developed financial systems and institutions

the international liquidity explosion and worldwide inflation the evidence from sterilization coefficient estimates abstract many commentators have pointed to the huge us payments deficits and international liquidity explosion of the early 1980s as the major cause of the concomitant rapid rates of monetary expansion abroad and subsequent acceleration of worldwide inflation this international monetarist interpretation rests however on the assumption of only limited sterilization of reserve inflows by foreign monetary authorities this paper uses the major econometric estimates of sterilization coefficients to calculate the implied contributions of the reserve increases of this period to foreign monetary expansion these suggest that the reserve increases did in fact make a non trivial contribution to global monetary expansion but that for most countries they were not the dominant cause

credit constraints inequality and the growth gains from trade abstract this paper tests the hypothesis that in the presence of credit constraints higher wealth inequality affects negatively the growth gains from trade liberalisation variations in the growth rate of value added decomposed in the growth rate of the number of establishments and the growth rate in average size of manufacturing industries in 34 developing countries before and after trade liberalisation are used to study the effects of inequality on the difference in growth under liberalised and nonliberalised regimes the results show that the number of firms in industries with high dependence on external finance in countries with higher inequality grow significantly slower in both statistical and economic terms than in industries with low dependence on external finance in countries with lower inequality following a trade liberalisation relative to the closed economy period

fdi productivity and financial development this paper examines the effect of foreign direct investment fdi on growth factor accumulation physical and human capital does not seem to be the main channel through which countries benefit f rom fdi instead we f ind that countries with well developed financial markets gain significantly

has latin america s post reform growth been disappointing after years of poor economic performance many latin american countries undertook ambitious programs of macroeconomic stabilization and structural reform in recent years this change in policy created high expectations for the region and some observers have questioned whether actual growth outcomes have lived up to these expectations the authors offer evidence that the response of economic growth to reforms in latin america has not been disappointing because of their significant policy changes and despite a global slowdown latin america did well to return to its historic growth rate of 2 percent per capita in 1990 93 latin america has responded to changes in policy variables as would have been predicted by the experience of other times and places those earlier experiences are summarized by a panel regression spanning many countries and multi year periods from 1960 to 1993 to get consistent estimates of the parameters linking growth and policy variables the authors use a dynamic panel methodology that both controls for unobserved time and country specific effects and accounts for the likely internal dynamism of the explanatory variables

financial integration productivity and capital accumulation understanding the mechanism through which nancial globalization aects eco nomic performance is crucial for evaluating the costs and bene ts of opening nancial markets this paper is a rst attempt at disentangling the eects of nancial inte gration on the two main determinants of economic performance productivity tfp and investment i provide empirical evidence from a sample of 70 countries observed between 1975 and 1999 the results for both de jure and de facto indicators suggest that nancial integration has a positive direct eect on productivity while it does not directly aect capital accumulation i also control for indirect eects of nancial globalization through nancial development and banking and currency crises while nancial integration does not systematically increase domestic nancial depth it may raise the likelyhood of banking crises though only to a minor extent yet the overall eect of nancial liberalization remains positive for productivity and negligible for investment

integration and competition in the european financial markets abstract financial integration in europe should affect the competition between markets and intermediaries and generate a convergence of both interest rates and margins among different countries this paper analyzes both the evolution of the convergence in interest rates and the level of competition and its inequalities among the european banking systems for the period 1993 2001 the inequality index used the theil index allows us to break down the inequalities into a country and a specialization effect if the former effect dominates it would mean that national banking markets are segmented due to the existence of obstacles or barriers to integration on the other hand dominance of the latter effect would be related to the different level of competition depending on the type of banking specialization

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india

monetary policy and bank lending in developing countries loan applications rates and real effects abstract recent studies of monetary policy in developing countries document a weak bank lending channel based on aggregate data in this paper we bring new evidence using uganda s supervisory credit register with microdata on loan applications volumes and rates coupled with unanticipated variation in monetary policy we show that a monetary contraction reduces bank credit supply increasing loan application rejections and tightening loan volume and rates especially for banks with more leverage and sovereign debt exposure there are associated spillovers on inflation and economic activity including construction permits and trade and even social unrest

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

returns to investment in education a global update the author updates compilations of rate of return estimates to investment in education published since 1985 and discusses methodological issues surrounding those estimates some key patterns among the three main levels of education primary education continues to exhibit the highest social profitability in all world regions private returns are considerably higher than social returns because of the public subsidization of education the degree of public subsidy increases with the level of education which is regressive social and private returns at all levels generally decline by the level of a country s per capita income overall the returns to female education are higher than those to male education but at individual levels of education the pattern is more mixed the returns to the academic secondary school track are higher than the vocational track since unit cost of vocational education is much higher and the returns for those who work in the private competitive sector of the economy are higher than in the public noncompetitive sector and the returns in the self employment unregulated sector of the economy are higher than in the dependent employment sector controversies in the literature are discussed in the light of the new evidence the undisputable and universal positive correlation between education and earnings can be interpreted in many ways the causation issue on whether education really affects earnings can be answered only with experimental data generated by randomly exposing different people to various amounts of education given the fact that moral and pragmatic considerations prevent the generation of such pure data researchers have to make do with indirect inferences or natural experiments some have been attempted the author looks at the research on overeducation or surplus schooling the conclusions reinforce earlier patterns they confirm that primary education continues to be the number one investment priority in developing countries they also show that educating females is marginally more profitable than educating males that the academic secondary school curriculum is a better investment than the technical vocational tract and that the returns to education obey the same rules as investment in conventional capital that is they decline as investment is expanded