Economic growth and financial development are similar to two gears in the nice machine that when one is perfectly rolling the other one may automatically respond. Put simply, financial development is any increase in the capacity of financial institutions, financial markets and financial instruments to ease the savings, borrowing, investment, and risk-management activities of individuals and firms.
Economic expansion, on the other hand, is the steady rise in production of goods and services produced over a long period of time, which is normally shown as a measure of GDP.Although the two are distinct notions, history and contemporary economics reveal that there is a profound interrelation in the two. Good financial systems contribute to increasing the sizes of economies and it is always the increasing economies that require more improved financial systems.
Key Takeaways
Mutually Reinforcing- Financial development absorbs the reciprocating effect of economic growth in an unending cycle.
Increases Investment-Innovation-Efficient financial systems will direct savings into useful projects and entrepreneurial activities.
Risk Management- complex financial instruments secure businesses and individuals against economic surprises.
Inclusivity Matters- Sustainable growth cannot start as long as the financial services do not provide to everyone in the society.
Technology is a Game-Changer: Digital banking, fintech and mobile payments are opening new horizons and increasing efficiency.
Key Regulation- Good governance is the guard against financial crisis and future stability.
How Financial Development Spurs Economic Development?
1.Optimize the use of Resources
With the development of the financial markets, savings are directed at efficient investments. This implies that rather than the money lying idle, it will be used in businesses, infrastructural projects, and innovations that create jobs and revenues. Important roles here are played by banks, the stock markets, and the investment funds.
2.Encouraging Entrepreneurship
Small and medium-sized enterprises (SMEs) have access to finance as their lifeline many times. Entrepreneurs who are able to borrow, raise capital and to put new ideas into practice through a healthy financial system grow the economy and fill the labor market with employees.
3.Risk Management
Financial development brings in financial instruments such as insurance, derivatives, and mutual funds that enable firms and individuals to cope more with risks. This is stability that fosters investment and long-term planning which enhances a stable growth.
4.Pushing Savings and Investments
Fully developed financial organizations promote savings to people with favorable interest rates, security, and convenience. The savings in turn avail themselves into an investment capital money in economic projects.
5.Global integration with Global Markets
Foreign direct investment (FDI) is easily attracted in countries that have good financial systems. The investors in the world would prefer to invest in an economy that has a functional banking system, the stock market, and a safe legal system.
Read also: Amazing Natural Benefits of Sesame Oil for Food, Hair & Skin
Wouldn’t it Take a Coin to Flip?
• Financial development may speed up the growth, but it may be accompanied by threats when it is poorly managed. For example:
• Asset bubbles are also a possibility of over-lending as experienced during the world financial crisis in 2008.
• Certain groups, more often than not, rural populations, can be marginalized by financial exclusion as a result of which they become numbers and not part of the growth story.
• The economic imbalance can be due to corruption and poor regulation in financial institutions.
This implies that the promise of financial growth must go hand in hand with vigilant governance, transparency, and regulation systems that would help avoid crises and moreover, that prosperity would extend to every section of the society.
Financial Development through Economic Growth
• This relationship is not one sided. When an economy is growing:
• Individuals make better money, save more and require improved financial services.
• The governments can invest in more advanced infrastructure of banking and digital payments.
• The growing industries also develop the need to use more advanced forms of financial instruments such as bonds, venture capital, and insurance packages.
That is, economic development generates not only the demand but also the possibility of newer stages of financial systems and thus, makes the relationship between two, an endless series of artifacts.
The Role of the Digital Revolution
The world of technology has elevated the development of finance in the current world. Financial inclusion is occurring in developing countries due to blockchain solutions, mobile banking and fintech platforms.
By way of example, mobile money in Africa has opened access to millions of unbanked individuals to the formal financial system and spurred local businesses and economic activity.
In the same regard, India has transformed transactions in its country via UPI (Unified Payments Interface) which decreased cash dependence and promoted formal economic engagement.
Conclusion
Economic growth and financial development are two processes that are mutually exclusive and determine the prosperity of a country. Developed financial systems enhance entrepreneurship, enlivens investments, oversees the risks and links the economies to the global economy. Subsequently, economic growth leads to increased demand in more sophisticated financial services which is a positive cycle itself.
Financial development has its advantages, however, its advantages can only be achieved with written rules, inclusive policies and technological innovation. An economy that is capable of achieving a balance between its growth and financial stability makes sure that its growth is not only fast but rather sustainable and fair.
After all, financial development is not only an issue of larger banks or more elevated stock exchange towers, it is all about establishing an environment where every citizen can become part of the economic process the country experiences and reap the results of it.