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Abstract
Financial development, by providing agents with better market access, liquidity, and diversity of instruments, has the potential to unleash new growth sources and help countries reap the benefits of globalization and make the transition to higher income levels. Although Figure 9.1 simply shows a correlation, an extensive literature has documented the mostly positive impact from financial development on countries’ income levels and growth. Efficient financial systems help channel funds to productive uses, provide insurance against shocks, reduce information asymmetries, and can potentially alleviate poverty and inequality (Beck, Demirgüç-Kunt, and Levine 2004). Sound financial systems can also foster innovation and entrepreneurship through risk diversification (King and Levine 1993).
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