Financial Development and Economic Growth in Corporatist and Liberal Market Economies

The paper addresses the significance of financial development as a possible determinant of economic growth. Economists and policymakers in transition economies and emerging markets are certainly aware of the key role that, in a market economy, the financial system is supposed to play in the process of allocating scarce resources to their final uses. However, to fulfill this function, the financial sector itself is using up resources, and it is not obvious, whether or under which conditions the overall balance is a favorable one. An empirical analysis of these questions is based on a panel data set covering ninety-three countries from 1970-90. According to this data, financial activity has generally supported economic growth. To clarify whether socioeconomic characteristics modify the structure of the finance-growth nexus, the countries are classified according to their degree of corporatism. It is shown that the partial correlation between (lagged) proxies for financial development as well as its interaction terms and growth are significantly higher in the more corporatist subgroup of countries. When designing appropriate policies for the setup and reform of a financial system in transition economies and emerging markets, it is therefore crucial to consider the embeddedness of economic institutions into their broader social, cultural, and historical surroundings.