Proposal Report: Economic Growth and Financial Development

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Economic growth, specifically long-term economic growth, and development relies on the capability of human capital to accumulate value. This means the ability of team managers to be more efficient with asset production, but also making sure efficient fund allocation is implemented and invested in the most useful places. Traditionally, banks, alternative financial institutions, stock markets, pensions funds have been utilize to evolve individual savings from income into additional capital monitored and invested by enterprises. The benefits and adverse affects of this type of model can be cyclical. The risk creates an environment where in order to ensure stable financial development and economic growth in any organization where an enterprise in the private or public sector or a specific government, are reliant on financial intermediaries.

A common model used in assessing the relationship between financial development and economic growth is the McKinnon-Shaw model. As AK and Kara (2011) say, “according to McKinnon- Shaw, Levine and King, several restrictions (financial repression) imposed on the banking system by the government can slow down the development of the financial system and therefore, can cause negative results on economic growth.” The authors identify these negative results as things like compulsory high-level reserve applications, higher interest rates. In a study covering 109 industrialized and developing countries the relationship between financial development and economic growth was assessed, and it was found that economies that have financial markets have all developed on a more advanced levels than those countries that do not have financial markets.

Acharya (2011) McKinnon notes that financial markets create an environment or financial deepening, predominantly because they are exposed to more aggressive growth. The impact financial institutions have on economic growth is critical. This is known as financial intermediation and it’s usually...
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