Question

Anecdotally, developed economies have sophisticated financial systems and less developed economies have less sophisticated financial systems. (This is briefly mentioned in the section on the financial system to be covered in the next lecture.) Is this anecdotal evidence actually supported by hard data? How are financial development and economic growth and development related? What difficulties are there in trying to clearly identify this relationship?

Answer 1

This is definitely one of myths as there is no empirically proven evidence because of contrasting cases we have seen where smaller nations like Luxembourg,India,Malaysia and Singapore have been one of best cases of financialization. Countries like China and Russia too have unstructured banking system with autocracy in governance.

Hence we conclude that it is more depending on ruling Government andaCentral Bank of econonomy which decides financial system and its robustness rather than less developed vs developed natiins.

Financialization and economic growth go hand in hand as this helps in increased liquidity and soundproofing transaction system which helps firms in development and hence economic growth prospers.

The various difficulty however faced are bureucracy, office politics, high cost of infrastructure, heavy burden of taxation and compliance.