Finance and Growth: Empirical Evidence from Developing Countries 1960-1990

This paper examined the empirical relationship between financial intermediation and economic growth using cross-country and panel data regressions for 69 developing countries for the period 1960-1990. The main results are: (i) Financial development is a significant determinant of economic growth in cross sectional regressions. (ii) Financial markets cease to exert any effect on real activity in panel data regressions. The paradox may be explained, in developing countries, by the lack of an entrepreneurial private sector capable to transform the funds into profitable projects. (iii) The effect of financial development on economic growth is channeled mainly through an increase in investment efficiency.