How important is financial reform?

One sees a lot of crude real vs. financial reforms arguments in India these days. Many people are convinced that a sophisticated financial system is not important for India's growth. Two papers which came out in the last week help illuminate these questions.



In a working paper Quantifying the Impact of Financial Development on Economic Development, Jeremy Greenwood, Juan M. Sanchez and Cheng Wang look at the size of the impact of financial modernisation in economic development. The headline summary: Roughly one-third of Uganda's underdevelopment would go away if it built a world class financial system (and did nothing else right).



In a paper Can financial development cure the dutch disease? in International Journal of Finance & Economics, Christian Saborowski tells a story that's directly pertinent in today's India: when the domestic financial system is more liquid, the exchange rate appreciation associated with capital inflows is reduced.