Abstract and Keywords
The bulk of the empirical literature on finance and development suggests that well-developed financial systems play an independent and causal role in promoting long-run economic growth. More recent evidence also points to the role of the sector in facilitating disproportionately rapid growth in the incomes of the poor, suggesting that financial development helps the poor catch up with the rest of the economy as it grows. These research findings have been instrumental in persuading developing countries to sharpen their policy focus on the financial sector. If finance is important for development, why do some countries have growth-promoting financial systems while others do not? What can governments do to develop their financial systems? This article addresses these questions. It provides a brief review of the extensive empirical literature on finance and economic development and summarizes the main findings. It discusses the governments' role in building effective and inclusive financial systems. It concludes with a discussion of the implications of the still-unfolding financial crisis on financial sector policies going forward.
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