Finance and Growth: Schumpeter Might Be Right

49 Pages Posted: 20 Apr 2016

See all articles by Vladimir Drebentsov

Vladimir Drebentsov

World Bank - Moscow Office

Joel Bergsman

World Bank

Harry G. Broadman

World Bank - Europe and Central Asia Region

Date Written: February 28, 1993

Abstract

Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions -stimulate technological innovation and economic development. The authors present evidence that supports this view. Examining a cross-section of about 80 countries for the period 1960-89, they find that various measures of financial development are strongly associated with both current and later rates of economic growth. Each measure has shortcomings but all tell the same story: finance matters. They present three main findings, which are robust to many specification tests: The average level of financial development for 1960-89 is very strongly associated with growth for the period. Financial development precedes growth. For example, financial depth in 1960 (the ratio of broad money to GDP) is positively and significantly related to real per capita GDP growth over the next 30 years even after controlling for a variety of country-specific characteristics and policy indicators. Financial development is positively associated with both investment rate and the efficiency with which economies use capital. Much work remains to be done, but the data are consistent with Schumpeter's view that the services provided by financial intermediaries stimulate long-run growth.

Keywords: Governance Indicators, Achieving Shared Growth, Economic Theory & Research, Inequality, Economic Growth

Suggested Citation

Drebentsov, Vladimir and Bergsman, Joel and Broadman, Harry G., Finance and Growth: Schumpeter Might Be Right (February 28, 1993). World Bank Policy Research Working Paper No. 1083, Available at SSRN: https://ssrn.com/abstract=630701

Vladimir Drebentsov

World Bank - Moscow Office ( email )

Economics Unit
Moscow
Russia

Joel Bergsman

World Bank

1818 H Street, N.W.
Foreign Investment Advisory Service
Washington, DC 20433
United States

Harry G. Broadman (Contact Author)

World Bank - Europe and Central Asia Region ( email )

1818 H Street
Washington, DC 20433
United States
202-473-1312 (Phone)
202-522-2753 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
488
Abstract Views
3,939
rank
62,567
PlumX Metrics