The role of finance in economic development: Benefits, risks, and politics

This article explores the role of the financial sector for economic growth, the causes and consequences of financial fragility, and the politics behind financial deepening and fragility. In doing so, it identifies the critical role of the financial sector within capitalist economies, a role with bright and dark sides. Specifically, it surveys the large theoretical and empirical literature that links a sound financial system to the process of economic development. It discusses the theoretical and empirical literature on bank fragility and banking crises and surveys the literature on the political economy of financial deepening. Importantly, it relates these three strands of the literature to each other and to the current crisis