Finance and Development: A Factual Study Some Early Findings

Comments: This paper, or should we say proposal for a study, is a replacement for a last minute cancellation. We agreed to present what we have so far in the hope and expectation that we would receive valuable feedback that would result in an improved study. Economic development requires large investment. Associated with the development of market economies is the development of market arrangements to finance these large investments. In England and Scotland in the hundred year period 1675-1775, quite sophisticated arrangements developed for the market financing of trade, which expanded dramatically during this period (see for example Price, 1989). In the early 1700s, England had security markets where not only stocks were traded but also options, bonds, bill of exchanges and even derivative securities. One view is that the development and use of these arrangements for the financing of trade played a key role not only in the expansion of foreign trade and growth in that period, but also in the industrial revolution which followed. Goldsmith (1969), McKinnon (1973), and Shaw (1973) all assign an important role to the development of financial intermediation in economic development and have documented that financial claims of intermediaries against the private sector relative to gross domestic product increase with economic development. Additional evidence in support of the importance of financial development in economic development is provided by King and Levine (1992), who find that growth rates are correlated with many indicators of financial development in cross-country data. Not surprisingly then, given the resurgence of interest in economic development, theorists are developing growth models with the property that financial intermediation plays a key role. Examples of such model