The Role of Finance in Economic Development: Benefits, Risks, and Politics

Abstract

Theoretical and empirical research has shown that a sound and effective financial system is critical for economic development and growth. The financial system, however, is also subject to boom and bust cycles and fragility, with negative repercussions for the real economy. Further, the political structure of societies, often pre-determined by historic experience, is critical for the structure and development of the financial system. This paper is a critical survey of three related strands of literature – the finance and growth literature, the literature on financial fragility, and the politics and finance literature

Keywords: financial development, financial fragility, finance and politics, economic development, access to finance, banking crisis

JEL Classification: G0, G1, G2, O1, O4