Local Financial Development and Growth

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.

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Bibliographic Details
Main Author: Kendall, Jake
Language:English
Published: 2009-02-01
Subjects:ACCESS TO FINANCE, ACCESS TO FINANCIAL SERVICES, ACCESS TO LOANS, ADULT ILLITERACY, AGRICULTURE, AUTONOMY, BALANCE OF PAYMENTS, BALANCE OF PAYMENTS CRISIS, BALANCE SHEET, BANK BALANCE SHEET, BANK BRANCH, BANK CREDIT, BANK DEPOSIT, BANKING INDUSTRY, BANKING SECTOR, BANKING SECTOR DEVELOPMENT, BANKING SECTOR OUTREACH, BANKING SECTORS, BANKING SYSTEM, BOND, BOND MARKETS, BORROWER, BORROWING, BRANCH BANKING, CALCULATIONS, CAPITAL ACCUMULATION, CAPITAL FLOWS, CAPITAL MARKETS, CENTRAL BANK, CHECKS, COLLATERAL, COMMERCIAL BANK, COMMERCIAL BANK CREDIT, COMMERCIAL BANKS, CONTRACTUAL SAVINGS, CONTRIBUTION, CONTRIBUTIONS, CORRUPTION, CREDIT MARKET, CREDIT MARKETS, CREDITOR, DEMAND CURVES, DEMAND FOR CREDIT, DEPOSIT, DEPOSIT ACCOUNTS, DEPOSIT SERVICES, DEPOSITS, DEPRECIATION, DEREGULATION, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT ECONOMICS, DISTRIBUTION OF INCOME, DISTRICT GOVERNMENTS, DOMESTIC CAPITAL, ECONOMETRICS, ECONOMIC ACTIVITIES, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC HISTORY, ECONOMIC PERFORMANCE, ECONOMIC REFORM, ECONOMIC STRUCTURES, ECONOMIC THEORY, ENDOGENOUS VARIABLES, ENROLLMENT, ENTREPRENEUR, ENTREPRENEURS, EXTENSION OF CREDIT, EXTERNAL FUNDS, FAVORABLE TERMS, FINANCIAL ACCESS, FINANCIAL CAPACITY, FINANCIAL CONSTRAINT, FINANCIAL CONSTRAINTS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL INTERMEDIATION, FINANCIAL LITERACY, FINANCIAL MARKETS, FINANCIAL REGULATIONS, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL SYSTEM, FIXED COSTS, FOREIGN BANKS, FORMAL ECONOMY, FORMAL FINANCE, FORMAL LENDING, FUTURE CREDIT, FUTURE GROWTH, GDP, GLOBALIZATION, GROSS DOMESTIC PRODUCT, GROWTH MODELS, GROWTH RATE, GROWTH THEORY, HOLDING, HOUSEHOLDS, HUMAN CAPITAL, HUMAN DEVELOPMENT, INCOME LEVELS, INDIVIDUAL ACCESS, INDUSTRIALIZATION, INFLATION, INFORMAL ECONOMY, INSTRUMENT, INSTRUMENTS FOR CREDIT, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INVESTABLE FUNDS, INVESTMENT OPPORTUNITIES, LEGAL CONSTRAINT, LEGAL PROTECTIONS, LEGAL SYSTEM, LENDER, LOAN, LOANABLE FUNDS, LOCAL BANKS, LOCAL ECONOMY, LOCAL GOVERNMENT, LOCAL SAVINGS, MACROECONOMIC STABILITY, MACROECONOMIC VARIABLES, MARGINAL PRODUCT, MARGINAL PROPENSITY TO SAVE, MARKET DEVELOPMENT, MARKET SEGMENTATION, MEDIUM ENTERPRISES, MONEY MARKET, MONEY SUPPLY, MORAL HAZARD, NATIONAL ECONOMIES, NDP, NET DOMESTIC PRODUCT, OPEN ECONOMIES, OPEN ECONOMY, ORIGINAL INSTRUMENTS, PER CAPITA INCOME, PHYSICAL CAPITAL, POLITICAL ECONOMY, PRIMARY EDUCATION, PRIVATE CREDIT, PROBABILITY, PRODUCTION FUNCTION, PRODUCTIVITY, PRODUCTIVITY GROWTH, PROPENSITY TO SAVE, PUBLIC GOOD, RAPID GROWTH, RATE OF GROWTH, REAL INCOME, RESERVE, RESERVE BANK, RESERVE BANK OF INDIA, RESERVE REQUIREMENTS, RETURNS, SAVINGS, SECURITIES, SECURITIES LAW, SMALL BUSINESS, SMALL BUSINESS BORROWERS, SMALL BUSINESS LENDING, SOCIAL BANKING, STOCK MARKET, STOCK MARKET DEVELOPMENT, STOCK MARKETS, SUPPLY CURVES, SUPPLY OF CREDIT, TRANSPORT, VALUABLE, VILLAGE, VILLAGES,
Online Access:http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090213151623
https://hdl.handle.net/10986/4034
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