Perspective - (2022) Volume 10, Issue 2
Received: 02-Feb-2022, Manuscript No. economics-22-58018;
Editor assigned: 07-Feb-2022, Pre QC No. P-58018;
Reviewed: 14-Feb-2022, QC No. Q-58018;
Revised: 21-Feb-2022, Manuscript No. R-58018;
Published:
28-Feb-2022
, DOI: 10.37421/2375- 4389.22.10.400
Citation: Jiang, Shi. “Financial Development of a Country.” J Glob Econ 10 (2022): 400. DOI: 10.37421/2375-4389.22.10.400
Copyright: © 2022 Jiang S. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
The financial sector refers to the institutions, instruments, and markets, as well as the legal and regulatory framework, that enable credit-based transactions. Fundamentally, the goal of financial sector development is to reduce "costs" in the financial system. Financial contracts, markets, and intermediaries emerged as a result of this process of lowering the costs of getting information, enforcing contracts, and conducting transactions. Various types and combinations of information, enforcement, and transaction costs, as well as various legal, regulatory, and tax regimes, have prompted various financial contracts, markets, and intermediaries across countries and throughout history. A financial system's five key functions are: (i) generating information ex ante about potential investments and allocating capital; (ii) monitoring investments and exercising corporate governance after providing finance; (iii) facilitating risk trading, diversification, and management; (iv) mobilising and pooling savings; and (v) facilitating the exchange of goods and services.
Financial sector growth happens when financial instruments, markets, and intermediaries reduce the effects of information, enforcement, and transaction costs, allowing the financial sector to perform its core functions more effectively. A considerable body of research demonstrates that the development of the financial sector has a significant impact on economic development. By boosting the savings rate, mobilising and pooling funds, producing investment information, facilitating and encouraging foreign capital inflows, and optimising capital allocation, it fosters economic growth through capital accumulation and technical progress. Financial development is not simply an outcome of economic growth; it contributes to it. Countries with better-developed financial systems tend to grow faster over long periods of time, and a large body of evidence suggests that this effect is causal: financial development is not just an outcome of economic growth; it contributes to it.
Furthermore, it improves poverty and inequality by boosting poor and vulnerable populations' access to finance, facilitating risk management by reducing their exposure to shocks, and raising their income. Small and medium-sized firms (SMEs) can benefit from financial sector development by having easier access to capital. Small businesses are often labor-intensive and generate more jobs than huge corporations. They are crucial to economic development, especially in emerging economies [1-3].
Financial sector development entails more than just putting in place financial intermediaries and infrastructure. It necessitates the establishment of strong policies for the regulation and oversight of all significant entities. The global financial crisis highlighted the negative implications of ineffective financial sector policies. The financial crisis has demonstrated the potentially destructive effects of ineffective financial sector policy on financial development and economic outcomes. Finance is important for development, both when it works well and when it doesn't. However, because a country's financial sector consists of a wide range of financial institutions, markets, and products, these estimates are only a general guide and do not account for all aspects of financial development. To evaluate financial progress around the world, the World Bank's Global Financial Development Database established a comprehensive yet relatively simple conceptual 4x2 framework. Financial depth, access, efficiency, and stability are four sets of proxy variables that characterize a well-functioning financial system, according to this theory. The two major components of the financial sector are financial institutions and financial markets. In financially open economies, financial development has a direct impact on macroeconomic stability. Boom-bust cycles are induced or exacerbated by abrupt shifts in the direction of capital flows in emerging countries that lack extensive and well-functioning financial systems. Furthermore, weak or poorly managed domestic financial sector liberalizations have been a major contributor to financial integration-related crises. The lack of well-developed financial markets appears to be a major factor in understanding the positive relationship between financial integration and consumption growth volatility [4,5].
Economic development is inextricably linked to financial development: support of entrepreneurial activity and innovation is widely seen as the most important relationship between finance and growth. Entrepreneurs in emerging economies may suffer severe credit constraints. The financing gap is especially wide for startups, leading to these countries' high number of extremely tiny businesses. Early modern financial development was inextricably linked to the consolidation of a worldwide merchant society that was transnational, multicultural, and dispersed. There are a number of complicated aspects for developing countries, not least the tight ties that certain countries have between the financial sector and the government. Economic Factors in Economic Development are:
1) Capital Formation
2) Natural Resources
3) Marketable Surplus of Agriculture
4) Conditions in Foreign Trade
5) Economic System
1) Human Resources
2) Technical Know-How and General Education
3) Political Freedom.
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