The effect of banking and insurance on the growth of capital and output

TLDR: The role of financial intermediaries over different stages of economic growth in emerging market economies is poorly understood as discussed by the authors, and the roles of these two types of intermediaries are poorly understood.

Abstract: Among emerging market economies, we observe countries that are rich in natural resources or blessed with high savings rates, yet with unimpressive economic growth rates. This fact points to the now widely accepted premise that capital itself is insufficient for economic growth. Institutions and environmental conditions that affect resource allocation appear also to be critical factors. If developing countries fail to create favorable conditions or to promote institutions that permit resources to flow to projects and industries promising the highest social return, their growth potential will be unrealized. Development theory, consequently, is today according greater attention to institutions that promote more efficient allocations of production factors. Financial intermediaries are widely credited with improving resource allocation. Banks and insurers help mobilize and allocate savings, monitor investment projects and credit risk, and mitigate the negative consequences that random shocks can have on capital investment. The roles of these two types of financial intermediaries over different stages of growth, however, are poorly understood.