machines are used as proxies for access to finance by households. Access to finance has significant effects on economic growth. This is evident from the findings of the strand in the literature that conducts firm-level analysis. The main message is that access to finance is a robust determinant of firm growth that matters more for small firms than for larger firms. Beck and Levine (2005), however, find that as the level of financial development increases, the importance of financing constraints for small firms’ growth decreases.

# **3. Finance and Employment**

A clear finding of this literature review is that only a handful of articles focus on the effects of financial sector development on employment in developing countries. Even when the sample is expanded to developed countries, it is difficult to find empirical analyses that address this important nexus. Table 11 in our inventory for this subsection lists a few papers that focus on developing countries.

The seminal paper on the finance-employment nexus is the theoretical and empirical analyses conducted by Gine and Townsend (2004) in Thailand between 1976 and 1996. They provide convincing evidence that financial deepening helped a substantial part of the workforce move from the agriculture sector to formal labor markets in urban centers, thereby raising average household income 17–34 percent. In terms of the direct effect of financial depth on employment, consider the recent paper by Pagano and Pica (2012), who find a positive effect on the order of 0.23–0.83 percent increase in employment growth.<sup>24</sup> In terms of the effect of financial stability on employment, Reinhart and Rogoff (2009) estimate that banking crises increase unemployment rates by 7 percentage points and recovery to pre-crisis levels takes a long time. The record is again held by the United States during the Great Depression with a 20 percentage point increase in the unemployment rate. World Bank (2009) surveys some descriptive evidence on the rise of unemployment rates across the world after the global crisis. Last but not least, Choudry, Marelli, and Signorelli (2010) suggest that a 1 percent increase in the systemic crisis index lowers the employment rate by 0.394 percentage point. When their sample is restricted to only high- and upper-middle-income countries, they estimate the effects to be 1.32 and 1.01 percentage point decreases, respectively.

In terms of the effect of access to finance on employment, Aterido, Hallward-Driemeier, and Pages (2007) find that not only sophisticated but also simpler forms of finance have significant positive effects on employment growth. Aterido and Hallward-Driemeier (2010) document that access to finance is a crucial constraint for micro firms in SubSaharan Africa but surprisingly find that employment growth is not curtailed by financing constraints.<sup>25</sup> In Bangladesh, Rabbani and Suleiman (2005) evaluate the effectiveness of BRAC's small and medium-sized enterprise (SME) lending program from an

> 24 The lack of empirical analyses in this nexus is evident in the literature review section of this paper. 25 Their explanation for this anomaly is the lack of competition and market access for micro firms. When they repeat the same exercise for countries outside Sub-Saharan Africa (e.g., comparable developing countries), they find that employment growth is curtailed by lack of access to finance.

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