Financial Development and Economic Growth in

The paper describes tests of hypotheses from economic history and theory concerning the significance of financial development as a possible determinant of economic growth. The empirical analysis is based on a large panel data set covering 93 countries from 1970–90. It goes beyond existing studies by drawing on a new proxy for financial development that refers to the input of real resources into the financial system. Moreover, interaction effects between financial development and catching-up as well as education are considered. It is shown that, according to our data, during the 1970s and 1980s, finance may well have been a determinant of growth. Finally, to clarify whether socio-economic characteristics possibly modify the general structure of the finance-growth nexus, the countries in our sample are classified according to their degree of corporatism. The resulting ranking is used to split the sample into a more and a less corporatist subgroup. It is shown that the generally positive partial correlation's between (lagged) proxies for financial development as well as its interaction terms and growth are significantly higher in the more corporatist subgroup of countries. It is therefore crucial to study the embeddedness of economic institutions like the financial sector into its broader social, cultural and historical surroundings.