The Finance-Growth Thesis: A Sceptical Assessment

Financial liberalisation is widely seen as key to promoting financial development and unlocking growth in developing countries. While this thesis has been backed by an extensive literature, we show that it rests on weak theoretical and empirical foundations. Data for Sub-Saharan Africa reinforce this sceptical assessment. The region has embraced the financial reform paradigm, but few robust positive results have followed. On the contrary, exploratory data analysis suggests that, to the extent that financial reform has made any contribution to developmental outcomes, domestic financial development is unlikely to have been the mediating channel. We conclude that the finance-growth thesis stands challenged and outline five lessons which future research should heed.