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Local financial development and growth (English)

Using a unique sample of net domestic product data for districts in India, I investigate the connection between banking sector development, human capital, and economic growth at the sub-national level. Using disaggregate data avoids many of the omitted variable problems that plague cross-country studies of the finance-growth connection and facilitates an instrumentation strategy. The findings show that the growth of many districts in India is financially constrained due to lack of banking sector development, and that the relationship between finance and growth may be non-linear. For the districts in the sample, moving from the 75th percentile of credit/net domestic product to the 25th percentile implies an average loss of 4 percent in growth over the 1990s. This indicates that the gains from increased banking sector outreach may be large. The analysis shows that human capital deepening can reduce the effect of the financial constraint and help decouple growth from financial development. In a district at the 25th literacy percentile, the implied growth loss due to a constrained banking sector is twice as large as in a district at the 75th literacy percentile. Thus, higher levels of human capital may activate alternative growth and production channels that are less finance intensive.

Details

  • Author

    Kendall,Clyde Jake

  • Document Date

    2009/02/01

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS4838

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2010/07/01

  • Disclosure Status

    Disclosed

  • Doc Name

    Local financial development and growth

  • Keywords

    human capital;banking sector;wide variation in growth rate;Financial Development and Growth;small and medium enterprise;banking sector outreach;innovation and productivity growth;high levels of literacy;public provision of education;balance of payment crisis;standard deviation of log;marginal propensity to save;finance and growth;banking sector development;rate of growth;net domestic product;demand for credit;bank balance sheet;percentage of income;per capita income;human capital accumulation;savings and investment;types of service;instruments for credit;impact on poverty;degree of variation;difference in income;extension of credit;small business borrower;education and literacy;local commercial bank;rapid growth rate;barriers to trade;adult literacy ratio;innovation and growth;dynamic panel technique;weak financial system;commercial bank deposit;aggregate production function;worker human capital;commercial bank credit;measure of inflation;Leaving the Bank;higher level skill;country growth regression;effects of shocks;rate of convergence;engine of growth;access to finance;steady state level;financial depth;Financial Sector;supply capacity;parameter value;social banking;robustness check;local bank;instrumental variable;Population Density;

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Citation

Kendall,Clyde Jake

Local financial development and growth (English). Policy Research working paper ; no. WPS 4838 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/415711468330352914/Local-financial-development-and-growth