Trade, Finance & Development: Overview of Challenges and Opportunities

Although there is an extremely robust positive correlation between various measures of trade and financial development on the one hand, and economic growth, on the other, the evidence concerning the direction of causation between economic growth, development, and other variables is not clear. Moreover, there is increasing evidence (as witnessed by the 2008 Global Financial Crisis) that countries can have financial sectors that are “too large.” This paper reviews recent work, including by the author, on the relationship between geography, institutions, trade, and finance and economic growth and development. It argues that high levels of financial depth, measured by credit as a fraction of GDP, is associated with less, rather than more, economic growth.