would like to focus now on the relationship between financial sector development and economic growth, and the contribution of education to the development, efficient functioning and stability of financial markets. what are the mechanisms through which the financial sector fosters economic growth? [ slide 17 ] in theory, the financial system can affect economic growth by influencing the investment and saving decisions of economic agents and by fostering innovation and productivity. a well - functioning financial system should ( i ) improve the available information on investment opportunities and reduce informational asymmetries ; ( ii ) facilitate the diversification and management of risk ; ( iii ) contribute to better corporate governance ; ( iv ) mobilise and pool savings ; and ( v ) foster the exchange of goods and services. the references to these functions highlights key features of the financial intermediation process, such as information availability and transformation, risk diversification and management and corporate governance, that clearly indicate the central role of education, knowledge and technological ( ict ) advances in the development and efficient functioning of financial markets. and the better a financial system performs these functions – that is, the more developed and efficient it is – the greater its contribution to economic growth. the empirical evidence supporting this proposition – that financial development and integration promote economic growth – is substantial. 15 numerous studies have shown that countries with more liquid capital markets and developed banking systems grow on average faster, and that financial sector reforms and financial liberalisation policies positively affect gdp growth and investment. for example, evidence from emerging and developing countries shows that financial liberalisation policies are followed by a 0. 5 % - 1 % increase in investment and a significant fall in the cost of capital ( by 100 basis points on average ). more generally, the evidence from cross - country and country - specific studies ( in both developed and emerging economies ) shows that deregulation, privatisation and financial development result in an acceleration of growth and a sustained increase in total factor productivity ( e. g. bekaert, harvey, and lundblad, 2006 ). financial development is especially beneficial for industries which for technological reasons depend predominantly on external finance ( rajan and zingales, 1998 ; guiso, jappeli, padula, and pagano, 2005 ). there is another important channel through which a well - developed financial system fosters innovation and sustained growth : by facilitating the rapid re - allocation of capital from declining industries to fastgrowing sectors, and, in this way, raising aggregate productivity in the economy.

“ endogenous ” growth theories have stressed the role of human capital in sustaining long - term growth, because it enables these economies to catch up with the technological frontier and innovate. 10 in line with these theories, which have also emphasised the importance of research & development and entrepreneurial activity, cross - country empirical studies show that human capital accelerates progress towards the technological frontier ( e. g. benhabib and spiegel, 1994 ). there are valuable lessons for the advanced eu countries, because the contribution of human capital is especially important for economies that are closer the technological frontier and thus depend more on innovation rather than imitation. 11 the role of human capital, and education in particular, in fostering innovation and a rapid adoption of technological advances has been crucial over the past decades, when technology has been “ biased ” towards highly - skilled labour. there is now a consensus that in the 1980s and 1990s ( and even in the 1970s ) technological progress has been favouring educated and highly trained workers. 12 for example, the private return on education in europe and the us rose from about 6. 5 % - 7. 5 % in the early 1970s to 10 % in the early 1990s. this increase was almost exclusively driven by college graduates and highly trained workers, who were the beneficiaries of the higher skill - bias of recent technological innovation. if we analyse this rather general result in greater depth, and assess the effect of education in facilitating technology adoption and the skill context of recent technological innovation, we find that countries with abundant human capital managed to better utilise technological innovations in skillintensive sectors in the 1980s and 1990s ( ciccone and papaioannou, 2005 ). and it was precisely those industries that experienced higher total productivity growth globally. [ slide 14 ] the chart on slide 14 illustrates this point. it shows the relationship between the cross - country marginal return on human capital at the industry level and the industry skill - intensity. there is a clear positive relationship between the effect of schooling for industry growth and the skill - bias of an industry. to cut a long story short, education appears to be far more important for the growth of r & d intensive sectors such as drugs and pharmaceuticals and computer and office equipment than footwear and textiles. [ slide 15 ] the next chart exhibits a similar relationship but uses educational quality as a proxy for human capital. the results are even more striking, indicating that educated societies were more successful in adopting the r &