Do well-functioning financial markets contribute to economic growth in less developed countries?

by John Söderlund

Institution: Södertörns Högskola
Year: 2014
Keywords: economic growth; credit market; developing countries; financial systems; financial development; Schumpeterian theory of economic development; Austrian business cycle theory; Social Sciences; Economics and Business; Economics; Samhällsvetenskap; Ekonomi och näringsliv; Nationalekonomi; samhälle/juridik; Social and Behavioural Science, Law; Economics; Nationalekonomi
Record ID: 1352416
Full text PDF: http://urn.kb.se/resolve?urn=urn:nbn:se:sh:diva-24075


This paper examines the correlation between credit intermediated by financial systems and economic growth in developing countries. More specifically we have studied whether well-functioning financial markets result in economic growth. We base our study on data from 53 low- and lower-middle income countries in the period 2004-2011. By comparing the two different economic theories, Schumpeter’s growth theory and Austrian business cycle theory, we have analysed our results from two different perspectives. The results from this study show an insignificant relationship between financial systems and economic growth, contradicting much of the theory and results from previous studies that have been reviewed. Other variables outside of the financial system in this study, such as economic freedom and corruption, could be a reason for the non-existent correlation between financial development and economic growth in this study.