This paper examines whether nancial development facilitates economic growth by scrutinizing one rationale for such a relationship; that nancial development reduces the costs of external nance to rms. Speci cally, we ask whether industrial sectors that are relatively more in need of external nance develop disproportionately faster in countries with more developed nancial markets. We nd this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. (JEL O4, F3, G1) A large literature, dating at least as far back as Joseph A. Schumpeter (1911), emphasizes the positive in uence of the development of a country's nancial sector on the level and the rate of growth of its per capita income. The argument essentially is that the services the nancial sector provides { of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse selection, or transactions costs { are an essential catalyst of economic growth. Empirical work seems consistent with this argument. For example, on the

This paper argues that the typical household’s saving is better described by a “bufferstock” version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor income growth, regardless of tastes. The model can explain three empirical puzzles: the “consumption/income parallel ” of Carroll and Summers [1991]; the “consumption/income divergence ” first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

We document five stylized facts of economic growth. (1) The “residual ” rather than factor accumulation accounts for most of the income and growth differences across nations. (2) Income diverges over the long run. (3) Factor accumulation is persistent while growth is not persistent and the growth path of countries exhibits remarkable variation across countries. (4) Economic activity is highly concentrated, with all factors of production flowing to the richest areas. (5) National policies closely associated with long-run economic growth rates. We argue that these facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, and that highlight the role of factor accumulation. Empirical work, however, does not yet decisively distinguish among the different theoretical conceptions of “total factor productivity growth.” Economists should devote more effort towards modeling and quantifying total factor productivity.

This paper -- a product of the Finance and Private Sector Development Division, Policy Research Department -- is pa't of a larger effort in the department to understand the links between the financial system and economic growth. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 679-53). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room N9-030, telephone 202-473-8526, fax 202-525- 1155, Internet address psintimaboagye@worldbank.org. December 1996. (44 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less tban fully pollsbed. The papers carry the names of the authors and should be cited accordingly. Tbe findings, interpretations, and conclusions expressed m tbis paper are entirely those of tbe author. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent

Many economists and policy makers believe that education creates positive externalities. Indeed, average schooling in U.S. states is highly correlated with state wage levels, even after controlling for the direct e¤ect of schooling on individual wages. We use variation in child labor laws and compulsory attendance laws over time and across states to investigate whether this relationship is causal. Our results show private returns to education that are around 7 percent, and external returns to education that are in the neighbourhood of 1-2 percent and not signi…cantly di¤erent from zero.

all R&D-performing countries converge to parallel growth paths. All other countries stagnate. Any parameter change that would have raised a country’s growth rate in standard Schumpeterian theory will permanently raise its productivity and per-capita income relative to other countries and raise the world growth rate. Transitional dynamics are analyzed for each country and for the world economy. Steady-state income differences obey the same equation as in neoclassical theory, but since R&D is positively correlated with investment rates, capital accumulation accounts for less than estimated by neoclassical theory. (JEL E10, O40) Cross-country evidence on income differences has been used in recent years to cast doubt

Summer Econometric Society Meetings, the SED Meetings, and the Fed System

provided helpful comments. Special thanks to Stefanie Schmidt for helpful advice on compulsory schooling data. The views expressed herein are those of the authors and not necessarily those of the National Bureau

Abstract not found

Cross national data show no association between increases in educational capital due to rising educational attainment of the labor force and the rate of growth of output per worker. This implies the association of growth of educational capital and conventional measures of TFP is large, strongly statistically significant, and negative. While these are the regression results “on average ” (from imposing a constant coefficient) it should be obvious the impact of education has not been the same in every country. There are three explanations for why the impact of education has varied and has so often fallen short of what was hoped. First, perhaps educational has been so low that “years of schooling ” have created no human capital. Second, perhaps the marginal returns to education fell rapidly as supply expanded while demand for educated labor was stagnant. Third, perhaps the institutional environment has been sufficiently perverse that the educational capital accumulation lowered economic growth. Some mix of the three explanations plays a role in most developing countries. 2 Where has all the education gone? 1 To be a successful pirate one needs to know a great deal about naval warfare, the trade routes of commercial shipping; the armament, rigging, and crew size of potential victims;