The link between economic growth and financial development: Evidence from districts of Bangladesh

Since the days of Walter Bagehot, a number of economists have described how financial development facilitates economic growth. An extensive empirical literature has subsequently established that the relationship between financial development and economic growth is conditioned by the cultural and legal environment, so that the positive effects of financial development on economic growth might not exist within any given national context. This study investigates whether financial growth has any role in the economic development of Bangladesh, using district-level data to estimate a spatial model. We find that both too little and too much financial development harms growth. We explain this pattern by arguing that the theoretical literature is indeed correct, that financial development facilitates growth, but that Bangladesh exhibits a pattern previous studies have found in Turkey and China, of widespread political interference with the financial sector, so that financial resources are not allocated to investments with the highest rate of return