Tài liệu Financial liberalisation and the relationship between finance and growth

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UNIVERSITY OF
CAMBRIDGE
Centre for Economic
and Public Policy


FINANCIAL LIBERALISATION AND THE RELATIONSHIP BETWEEN FINANCE AND GROWTH


Philip Arestis
University of Cambridge


CEPP WORKING PAPER NO. 05/05
June 2005


Department of Land Economy
19 Silver Street
Cambridge CB3 9EP
Telephone: 01223 337147
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Introduction


The relationship between financial development and economic growth has received a great
deal of attention throughout the modern history of economics. Its roots can be traced in Lydia
of Asia Minor where the first money was in evidence. The first signs of public debate,
however, on the relationship between finance and growth, and indeed on experiments with free
banking, can be located in Rome in the year 33 AD. In that year there was probably the first
classic case of public panic and run on the banks. The Romans debated intensely and fiercely
at that time the possibility of placing a hitherto free banking system under the control of the
government. Since then, of course, a great number of economists have dealt with the issue.
An early and intellectual development came from Bagehot (1873), in his classic Lombard
Street, where he emphasised the critical importance of the banking system in economic growth
and highlighted circumstances when banks could actively spur innovation and future growth
by identifying and funding productive investments. The work of Schumpeter (1911) should
also be mentioned. He argued that financial services are paramount in promoting economic
growth. In this view production requires credit to materialise, and one can only become an
entrepreneur by previously becoming a debtor .What [the entrepreneur] first wants is credit.
Before he requires any goods whatever, he requires purchasing power. He is the typical debtor
in capitalist society (p. 102). In this process, the banker is the key agent. Schumpeter (1911)
is very explicit on this score: The banker, therefore, is not so much primarily the middleman
in the commodity `purchasing power' as a producer of this commodity . He is the ephor of
the exchange economy (p. 74).


Keynes (1930), in his A Treatise on Money, also argued for the importance of the banking
sector in economic growth. He suggested that bank credit is the pavement along which
production travels, and the bankers if they knew their duty, would provide the transport
facilities to just the extent that is required in order that the productive powers of the
community can be employed at their full capacity (II, p. 220). In the same spirit Robinson
(1952) argued that financial development follows growth, and articulated this causality
argument by suggesting that where enterprise leads finance follows (p. 86). Both, however,
recognized this as a function of current institutional structure, which is not necessarily given.
In fact, Keynes (1936) later supported an alternative structure that included direct government
control of investment.


Although growth may be constrained by credit creation in less developed financial systems, in
more sophisticated systems finance is viewed as endogenous responding to demand
requirements. This line of argument suggests that the more developed a financial system is the
higher the likelihood of growth causing finance. In Robinson's (1952) view then, financial
development follows growth or, perhaps, the causation may be bidirectional. However,
McKinnon (1973) and Shaw (1973), building on the work of Schumpeter (chiefly 1911),
propounded the `financial liberalisation' thesis, arguing that government restrictions on the
banking system restrain the quantity and quality of investment (see, for example, Arestis and


1 I am grateful to Warren Mosler and Malcolm Sawyer for extensive and helpful comments. All remaining


errors, omissions and ambiguities are, of course, entirely my responsibility.