The aim of this synthesis paper is to provide a narrative to the empirical findings of the comprehensive literature review concerning the quantitative effects of financial development on economic growth and employment and various determinants of financial sector development. The literature review has been restricted mostly to high-quality academic research that focus on developing countries over the period of 1960-2012. Due to data constraints, this review also includes cross-country analysis, where developed and developing countries are stacked together. The main findings include (i) a positive relationship between financial development and economic growth and employment subject to a number of qualifications, (ii) a complicated relationship of regulations and supervision with financial sector development and (iii) a positive relationship between enabling institutional environment and financial sector development. This review also clarifies some missing avenues in the literature and provides a number of suggestions for future work.
This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.
How can the private sector work for development? This paper provides answers to this question from the firms’ perspective by examining the trade-offs that private firms face between maximizing their profits and achieving a positive social impact. In particular, it considers the experience of microfinance as the best available data source from the point of view of a firm engaged in development issues. The paper studies balance sheet data of microfinance institutions (MFIs) to understand what drives their financial self-sustainability. The analysis focuses on how this variable is affected by firm-level proxies for social impact, such as outreach to women and loan size, using both a quantile regression and an instrumental variable approach. The findings indicate that there is low risk of mission drift as MFIs become more financially sustainable. Indeed, serving women seems to increase financial self-sustainability in all types of institutions due to reduced risk. Moreover, increasing the loan size seems to be less important as firms gain financial self-sustainability. Nevertheless, even if more profitable MFIs tend to cope better with costs, they are also more sensitive to risk and market power. This can limit their role in financing projects with a higher long-term development impact, as well as it can reduce their interest in fostering market mechanisms forward. Therefore there is room for regulation to design risk mitigation mechanisms and promote competition.
