FINANCIAL DEVELOPMENT AND THE SOURCES OF GROWTH AND CONVERGENCE

Authors

  • Oleg Badunenko,

    1. University of Cologne, Germany; Universidad Pablo de Olavide, Spain
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  • Diego Romero-Ávila

    1. University of Cologne, Germany; Universidad Pablo de Olavide, Spain
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    • We thank Jesús Crespo-Cuaresma, Miguel León-Ledesma, Daniel Oto-Peralías, Carlos Usabiaga, Simon Wren-Lewis, and participants at the 2012 American Economic Association Annual Meeting held in Chicago (January 2012) for comments. We are particularly indebted to the editor and three referees of this journal for valuable comments that led to a substantial improvement of the article. Diego Romero-Ávila would like to dedicate this article to the memory of Prof. Vicente Blanes for his encouragement and support. Diego Romero-Ávila acknowledges financial support from the Spanish Ministry of Science and Technology through grant ECO2009-13357 and from the Andalusian Council of Innovation and Science under Excellence Project SEJ-4546. Please address correspondence to: Diego Romero-Ávila, Departamento de Economía, Métodos Cuantitativos e Historia Económica, Universidad Pablo de Olavide, Carretera de Utrera, Km. 1, Sevilla, Spain. Phone: +34 954348381. Fax: +34 954349339. E-mail: dromtor@upo.es.


  • Manuscript received June 2011; revised November 2011.

Abstract

We extend the deterministic, nonparametric production frontier framework by incorporating financial development. Our analysis convincingly shows that (1) failure to account for financial development overstates the role of physical capital accumulation in labor productivity growth, (2) most of this overstated contribution stems from the efficiency-enhancing role of well-functioning financial institutions, (3) international polarization is solely driven by efficiency changes, and (4) increased distributional dispersion of productivity is primarily driven by technological change. Model’s extensions to account for the growth effect of changes in the institutional environment only add to the argument about the overstated role of physical capital.

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