ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT

Economic Growth and Financial Development



Economic Growth and Financial Development

Introduction

Being the second-largest economy in the European Union and the seventh-largest economy globally, United Kingdom is a major global trading power. It possesses a diversified, highly developed; market-based economy that is being affected turmoil in the financial markets. In 2008, London was critically affected by the financial crisis, as a foremost international financial centre. Thousands of workers were laid off by U.K. banks and their international operations were scaled back during the crisis. There was nationalization of two banks, Northern Rock and Bradford & Bingley, and in the end of 2011, Virgin Mary bought the Northern Rock. Headwinds to economic growth of United Kingdom are generated through the slowdown of global economy and dubiousness in the euro area position, along with fiscal cutback and private deleveraging. As it was argued by World Bank (2001) that “both development of banking and of market finance help economic growth: each can complement the other” (p. 48) and market-based systems, particularly, increase growth with the supply of liquidity, which facilitates investment to be less risky, so that through liquid equity issues, companies can have access to capital but now the declining economy of United Kingdom, rising unemployment and inflation puts a question on the credibility of financial institution and market- based system of United Kingdom. It also raises a question that how the economic growth of a country and financial development are buttoned together.

Sustainable economic growth, in the long run, hinges upon the capability to move up the rates of accumulation of capital i.e. both physical and human, to utilize more expeditiously the ensuing productive assets, and to make sure the accessibility to these assets by the entire populace. This investment process is supported by financial intermediation through gathering domestic and foreign reserves together for investment by firms; assuring that firms can efficiently run the new capability by apportioning these funds to the most prolific use; and multiplying risk and rendering liquidity.

The formation and growth of institutions, tools and markets that sustain this investment and expansion process is engaged by financial development. Arraying from pension funds to stock markets, the role of intermediaries whether banks and non-bank financial, historically, has been to transform into enterprise investment from household savings, examine investments and apportion funds, and to value and disseminate risk.

However, in this context, financial intermediation has substantial externalities, which are positive in general (for example provision for information and liquidity) but in the systemic financial crises they can also be negative which are endemic to market systems.

Thus between financial development and economic growth, there is a clear relationship exist, and from Smith to Schumpeter- the minds of economists have been occupied by this relationship; though in both theory and empirics, the channels and still the way of causality have persisted up in the air. Furthermore, the extensive assortment of implicated organisational forms prohibited any obvious result as to economic growth might maximise with what type of financial ...