This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship: that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more-developed financial markets. We find this to be true in a large sample of countries over the 1980's. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

The Glass-Steagall Act of 1933 removed commercial banks from the securities underwriting business. We evaluate the argument for the separation of commercial and investment banking, that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality. A comparison of the performance of securities underwritten by commercial and investment banks prior to the Act shows no evidence of this. Instead, the public appears to have rationally accounted for the possibility of conflicts of interest, and this appears to have constrained the banks to underwrite high-quality securities.

The original purpose of the former was to help post-World War II reconstruction, the purpose of the latter was to help revive global trade while averting the “beggar-thy-neighbor ” exchange rate policies that characterized the inter-war years. Over the years, the World Bank has refocused on helping poor countries grow while the Fund broadly attempts to foster country policies that ensure macroeconomic stability and limit adverse spillovers to the rest of the world. It still is in the world’s self interest to reduce poverty and economic instability in all countries, not just because their effects spread through trade but also because they can be sources of conflict and terrorism, of politically difficult immigration and of environmental degradation. But can multilateral financiers like the World Bank and the IMF help attain these goals? In the past, they contributed through loans and through economic advice, with the former being the lever through which multilateral institutions forced countries to accept the latter. Over the years, the value of both contributions has eroded, as I will discuss. Multilateral institutions will have to change, doing old tasks in new ways as also performing new tasks such as slowing climate change. Critical to their transformation will be the attitudes of the countries that play the largest role in their governance. These then are the subject of the rest of the paper.

This paper studies the long run effects of financial crises using new bank and town level data from around the Great Depression. We find evidence that banking markets became much more concentrated in areas that experienced a greater initial collapse in the local banking system. There is also evidence that financial regulation after the Great Depression, and in particular limits on bank branching, may have helped to render the effects of the initial collapse persistent. All of this suggests a reason why post-crisis financial regulation, while potentially reducing financial instability, might also have longer run real consequences.

Does credit availability exacerbate asset price inflation? Are there long-run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render temporary credit-induced booms and busts persistent. We draw lessons for regulatory policy.

Why is there little robust evidence that foreign aid significantly enhances the economic growth of poor countries? The search for an explanation is becoming immensely important as industrial countries are being exhorted to increase their aid budgets in order to help developing countries achieve the Millennium Development Goals. Perhaps one should not expect an impact on growth from the mere infusion of additional capital into a country. But, perhaps, any beneficial effects are offset by adverse spillover effects, and academic focus should shift to determining what these are and how to mitigate them. In this regard, Figure is suggestive. We plot the log of the manufacturing to gross domestic product (GDP) ratio in a country against the log of the ratio of aid received to GDP for that country for two separate time periods (the late 990s and the early 980s), conditional on a number of variables. As the figure suggests, the more aid a country has received, the smaller its share of manufacturing. The coefficient estimate suggests that a percentage point increase in the ratio of aid to GDP is associated with a reduced share of manufacturing in total GDP of about 0.2 to 0.3 percentage points.

Major technological, regulatory, and institutional changes have made finance more widely available in recent years. The ability of institutions to price a variety of exotic instruments, and to assess and spread risks, has increased. More data on potential borrowers is now available, and it is also more timely. Improvements in accounting disclosure have resulted in greater borrower transparency. Deregulation has resulted in greater competition and better prices in markets. Finally, regulatory barriers protecting the turf of different kinds of institutions have come down, resulting in the emergence of new institutional forms. These changes amount to a bona fide financial revolution. In this article, we focus on the impact the revolution has had on the way firms are (or should be) organized and managed, and on the policy consequences. To do this, we first need to understand what firms are and what drives their organizational structure. A caveat is in order at the outset. Finance is not the only force transforming the nature of firms in the last two decades; deregulation and technological change have also played big roles. These have been explored elsewhere (see e.g., Rajan and Zingales, 2000); hence, our focus. I. Critical Resource Theory

This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. (JEL O4, F3, G1) A large literature, dating at least as far back as Joseph A. Schumpeter (1911), emphasizes the positive influence of the development of a country's financial sector on the level and the rate of growth of its per capita income. The argument essentially is that the services the financial sector provides -- of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse ...

What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper.

China has achieved tremendous economic progress in the last three decades, but there is much work to be done to make the economy resilient to large shocks, ensure the sustainability of its growth, and translate this growth into corresponding improvements in the economic welfare of its citizens. We discuss the complex challenges that Chinese policymakers face in striking the right balance in terms of speed and coordination of reforms. We argue that China's current stage of development, along with its rising market orientation and increasing integration with the world economy, may make the incremental and piecemeal approaches to reforms increasingly untenable and, in some cases, could even generate risks of their own. The present favorable domestic and external circumstances provide an excellent window of opportunity for bolder reforms and for tackling some deep-rooted problems without causing much economic disruption.