The Finance and Growth Nexus

Aubhik Khan* It is difficult to overemphasize the potential benefits of economic growth for improving human welfare. For example, Bangladesh, India, and Pakistan, three of the world’s lowest income nations, had real per capita GDP of $1908, $1633, and $1793, respectively, in 1992. In contrast, the equivalent values for three of the world’s highest income nations, Denmark, Sweden, and the United States, were $18,730, $18,387, and $23,220, respectively.1 So average per capita income in these nations was more than 11 times that in the poorer nations. Consequently, people living in these nations could afford a dramatically higher quality of life involving, for example, the consumption of vastly superior medical care and education. Unfortunately, if income growth in the poor nations continues at its average rate of about 2.84 percent per year—its pace over the