The Connection Between the Capital Market and Development


Casual observation suggests that an efficient financial system is one of the salient prerequisites promoting a country#x2019;s effective development and competitiveness, or as in the case of financial system distortions, a major impediment.121 Among the components advancing a country#x2019;s welfare, capital allocation, intertemporal smoothening, and risk sharing are continuously cited.122 Conversely, market losses at major stock exchanges at the beginning of the new millennium demonstrated the potentially volatile impacts of financial systems on development and challenged economic policies on national and international levels. Several diverging theoretical concepts and empirical studies have investigated whether a nexus between finance and economic growth or finance and economic development actually does exist. Yet, the main focus of research has been to analyse the impact of the finance sector on growth or on economic development, and in particular, the role of banks and stock markets therein.123 Other aspects, albeit they could be considered important for an overarching development point of view, have been only partially included, among them the versatile reciprocal relationship of finance and development and a capital market perspective covering both stock and bond markets.124 The main obstacle to constructing a comprehensive model of the finance-growth or finance-development linkage consists of the complex causalities between finance and economic activity, not to mention the broader scope of developmental approaches that integrate social and environmental dimensions.


Stock Market Capital Market Financial System Financial Development Bond Market 
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© Deutscher Universitäts-Verlag | GWV Fachverlage GmbH, Wiesbaden 2006

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