Question

Some Economists argue that one of the reasons that economies in developing countries grow so slowly is because they do not have well-developed financial markets. Does this argument make sense? Discuss. Note: Your answers should be detailed with proper references.

Answer 1

Financial markets - Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. Financial markets are vital to the smooth operation of capitalist economies.

Yes, the argument is practical. The markets are significant in stimulating efficiency in an economy.The financial system comprises all financial markets, instruments and institutions. Today I would like to address the issue of whether the design of the financial system matters for economic growth. My view is that the answer to this question is yes. According to cross-country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth. While some gaps remain, I would say that the financial system is vitally linked to economic performance. Nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic development.

Some economists just do not believe that the finance-growth relationship is important. For instance, Robert Lucas asserted in 1988 that economists badly over-stress the role of financial factors in economic growth. Other economists strongly believe in the importance of the financial system for economic growth. They address the issue of what the optimal financial system should look like.

The financial system is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth. In countries with a highly developed financial system, we observe that a greater share of investment is allocated to relatively fast growing sectors. When we look back more than one century ago, during the Industrial Revolution, we see that England's financial system did a better job in identifying and funding profitable ventures than other countries in the mid-1800s. This helped England enjoy comparatively greater economic success.

Conclusion - In conclusion , we can say that financial market plys a very vital role in economic growth. It is as important as other factors of economic growth. So, developing countries should concentrate on developing financial market so that their economic growth can be possible.