The Banking Sector And Economic Growth Economics Essay

A changeless and sustainable fiscal sector is necessarily one the noticeable factors involved in Mauritiuss economic growing but we can besides state that an addition in economic growing has brought about an addition in the demand for fiscal services, that is, services offered largely by Bankss and other fiscal establishments. The banking sector may be considered as one of the pillars and a non-challengeable driver of economic growing and development. Economic growing and developments are both qualitative and quantitative steps of the progresss, and productive influences happening across an economic system.

Alexander Hamilton ( 1781 ) , one of the establishing male parents of the United States, argued that “ Bankss were the happiest engines that of all time were invented “ for spurring economic growing. Economic historiographers, such as Patrick ( 1966 ) and Richard ( 2003 ) , find that the most successful economic sciences tend to be 1s that developed sophisticated fiscal systems at an early phase.

The purpose here is to give anticipations on the relationship between the banking sectors and the economic growing.

1.2 Objective of the Survey:

The aim of the survey is to analyze the relationship between the banking sector and economic growing in Mauritius with surveies and researches carried out on the finance-growth link together with the causality issue so as to find whether banking sector contributes to economic growing in Mauritius and if economic growing allows the banking sector to be more efficient, that is, it aims to find the impact of different banking establishments on economic growing and measure the compatibility of province banking policies with state ‘s economic public presentation.

1.3 Structure of the Survey:

Chapter 1: Introduction

Chapter 2: Literature Reappraisal

Chapter 3: Research Methodology

Chapter 4: Findingss & A ; Analysis

Chapter 5: Discussion

Chapter 6: Recommendations and Conclusion.


2.1 Theoretical Review/Empirical Evidence:


Economic growing, to be direct, induces fiscal development, which can be considered as one of the engine to do economic growing thrust forward.

Empirical growing analysis was pioneered by Barro ( 1991 ) and Mankiw et Al ( 1992 ) .A big empirical literature on the determiners of economic growing in passage economic systems appeared in the 1990s and 2000s, including Fischer, Sahay and Vegh ( 1998 ) , Havrylyshyn, Izvorski and van Rooden ( 1998 ) , Berg et Al. ( 1999 ) , and Havrylyshyn and Van Rooden ( 2000 ) . The surveies have identified a assortment of microeconomic, structural, and institutional factors of economic growing in passage economic systems in general. A good description of empirical literature published in the 1990s is available in a study by Havrylyshyn ( 2001 ) .

Economic growing refers to an addition in the sum of goods and services produced over and above what the state has produced the old twelvemonth.

Rate of growing is obtained by spliting alteration in Real GDP by the original Real GDP, multiply by hundred.

GDP – Gross Domestic Product means the money value of goods and services produced within a state ‘s borders/geographical boundary by the factors of production within the state during a clip period normally a twelvemonth. It nevertheless, takes no history of ownership of the resources used to bring forth these goods and services. Some resources, although they are located within the boundary lines of one state, are really owned by the occupants of another country.GDP gives an thought about the size of a state as a market and GDP per capita gives an thought about the buying power of the people.

[ Wagess and wages ( including freelance income ) + trading net income + rent + involvement ] REWARDS = GDP.

With growing, national income would increase and given that the per centum addition in population is smaller than the per centum alteration in national income, the per capita income would lift and criterion of life would better. The chief benefit of economic growing is that it makes possible a higher criterion of life.

Economic growing besides makes it easier to assist the hapless. Without an addition in end product and income, the lone manner living criterions of the hapless can be raised is by taking income and hence goods and services from higher income groups. This would cut down the criterion of life of the rich. Whereas if economic growing occurs, at least some of the excess income can be given to the hapless in the signifier of higher benefits, thereby enabling them to bask more goods and services and this without cut downing the standard life of the rich.


To bring forth a higher end product, factors of production including labour must be used in greater measure. Hence, there would be occupation creative activity, which can cut down the unemployment degree.

Rising income means more revenue enhancement gross ( both direct & amp ; indirect ) for the Government. The latter uses this money to pass on schools and colleges, infirmaries, roads and many other services, which can profit the population.

Higher degree of ingestion for all to bask, which would better criterion of life, supplying they have money to purchase these goods. The criterion of life is determined by the per capita income where PCY = National income is divided by the size of the population

With growing, national income would increase and given the per centum addition in population is smaller than the per centum alteration in national income, PCY would lift and criterion of life would better. The chief benefit of economic growing is that it makes possible a higher criterion of life.

Economic growing besides makes it easier to assist the hapless. Without an addition in end product and income, the lone manner living criterions of the hapless can be raised is by taking income and hence goods and services from higher income groups. This would cut down the criterion of life of the rich. Whereas if economic growing occurs, at least, some of the excess income can be given to the hapless in the signifier of higher benefits, thereby enabling them to bask more goods and services and this without cut downing the criterion of life of the rich.

How to accomplish Economic growing?

Note foremost of all that for each state there is a complex set of factors, which determines its growing rate. Because the factors are so complex, it is non easy for authorities to prosecute policies, which aim to advance growing. Reforms may take many old ages to consequence. If, for case, the instruction system of a state is to be blamed for hapless growing rates, it will take decennaries to work out this job and to provide better educated people.

Economic growing is the enlargement of a state ‘s productive capacity. This leads to a rise in entire national end product. Growth can happen in tow different ways:

The increased usage of land, labor, capital and entrepreneurial resources by utilizing better engineering.

Management techniques and increased productiveness of bing resource usage through lifting labor and capital productiveness.

Economic growing is a qualitative step, that is, we produce goods and services with the factors of production – Land, Labour, Capital and Enterprise.Hence, anything which brings more resources or better resources would ensue in economic growing.













However, economic experts have identified four major causes of growing, addition in the accretion of capital goods ( investing ) , a higher quality of the labour force, greater efficiency in apportioning resources and technological alteration. Each is considered below:

Addition in the accretion of capital goods ( investing )

If workers in one state hold more capital goods with which to work than make their opposite numbers in other states, their productiveness will usually be higher. Even a comparatively simple device like an electric screwdriver has increased the productiveness of workers in the building industry tremendously. As agribusiness became more mechanized in the developed states, get downing in the late 19 century, productiveness improved. In less developed economic systems, husbandmans frequently turn merely plenty to back up their ain households, while in the United States, 3 % of the population presently employed in agribusiness produce more than Americans can eat. Even after the United States has exported a big portion of its agricultural production, there are still excesss of major harvests. Much of its addition in productiveness is due to the mechanisation of American agribusiness. Tractors and other equipment allow US farm workers today to make in an hr what might hold taken them a hebdomad to make, fifty or seventy five old ages ago. The consequence of an addition in capital goods per worker is shown below.

Output per worker

Capital Goods per worker

More inputs ( capital goods per worker ) evidently imply greater end product per worker, which is conductive to economic growing.

Higher quality of the labour force:

A more skilled and knowing work force is able to bring forth more and better goods and services. Investing in instruction is referred to as investing in human capital. In Mauritius, Education became free in the 1970 ‘s and today our instruction system is mandatory for the first nine old ages. Today, already more than 80 % of the population is literate in the state.

In fact, a more skilled and knowing work force is a cardinal component lending to growing. Many investors are non interested in puting in many African states even though labor is cheap ; because their labour force is unskilled. A state which has taken full advantage of investing in instruction to convey economic growing is Singapore – A state without any natural resource which has experienced an mean growing of over 7 % during the last three decennaries.

Relocating resources from low to high productiveness sectors.

As the economic system shifts resources such as labor from sectors in which they are less productive ( like traditional agribusiness ) to modern fabrication industries in which they are productive, the mean productiveness of the economic system goes up

In USA, for illustration, in 1870, 50 % of the work force was employed in agribusiness. Equally late as 1960, approximately 10 % of the labour force was employed in agribusiness, today the portion is less than tierce that sum, in fact, and it is 3 % .

In Mauritius, in the late sixtiess, more than 60 % of the population was working in the agricultural sector and in 2001, the figure was 11.4 % . On the other manus, the % of those working in the fabric and touristry has increased tremendously.

There have besides been alterations in the resettlement of resources within a peculiar sector itself. For illustration, in the agricultural sector, during the past decennaries in Mauritius, a big portion of tea plantation has been replaced with sugar plantation.

Technological alteration

The past century has seen many technological betterments, manifested in better merchandises, better ways of bring forthing goods, and better ways of forming production. Henry Ford ‘s development of the assembly line increased productiveness several fold within a twelvemonth. Technological alteration shifts the production map, intending that more end product can be produced with each degree of inputs. In peculiar, at each flat capital goods per worker is increased.

Beginnings of productiveness growing are interrelated:

These four beginnings of productiveness growing are interrelated. For illustration, a new machine ( technological alteration ) may besides necessitate new investing ( additions in capital goods ) . New thoughts do non merely go on ; it takes researches, applied scientists and good directors to convey them approximately. This in bend requires a high degree of human capital ( higher quality of the labour force ) .

Though these factors are of import and assorted together, but we can non deny the portion the banking sector have brought in economic growing and development, any economic system have witnessed over the past old ages. Indeed, the comparative importance of the banking sector can non be neglected, since where the universe is pointing itself, economic growing could fall in any clip if the banking sector takes a blow and therefore, we need to happen out how the banking sector impacts on growing of an economic system and how a more efficient economic system allows its banking sector to be competitory and more efficient.


Schumpeter ( 1934 ) put much accent on the function of the banking sector as a moneyman of productive investings and therefore as an gas pedal of economic growing. Most of the theoretical theoretical accounts relevant to the treatment of development economic sciences follow the outgrowth of endogenous growing theory. Pagano ( 1993 ) puts frontward 3 ways in which the economic growing can be affected by development and progresss of the fiscal sector under the basic endogenous growing theoretical account. First, it can increase the productiveness of investings. Second, an efficient banking sector will cut down costs and spur productive investings. Third, development will hold an impact of nest eggs either as an addition or as a hindrance to salvage.

The relationship between the banking sector and economic growing has received much attending from economic experts all over the universe and it will stay a long debated issue in the old ages to come. In fact, economic activity is certainly linked with Bankss in an economic system and lasting in a fast globalising universe and accommodating to the alterations would be hard if non impossible but a turning economic system would demand more of fiscal services, the services of a bank would hold to be conducted. Robinson ( 1952 ) argues that where endeavor leads, finance merely follows, proposing that it is economic development which creates the demand for Financial services and non frailty versa. Masih and Masih ‘s survey ( 1996 ) supports demand following hypothesis where economic growing causes fiscal sectors to develop. On this position, the more the rapid of the growing of national income, the greater will be the demand by endeavors for external financess and hence fiscal intermediation.

Economy activity certain revolves around the banking sector nowadays ; better Bankss would connote lower costs, more resourceful capital allotment leting more productivity growing.

Other theories put frontward that Bankss contribute to economic growing by bettering information airing and cut downing dealing costs.

Banks, more suitably, foreign Bankss through capital accretion, are of paramount importance to any economic activity. With reforms in the banking sector, banking inventions, nomadic banking, doing better the quality of life every bit good as criterion of life, they are bound to construct the economic activities across the whole universe delivery in its aftermath developments, more advanced communicating, easier manner to cover with every daily life modus operandis and more crucially the growing in the economic system. We are the new coevals, connoting better engineering and do more money, bring forthing more goods, presenting better services, the banking sector do non dawdle behind in doing this possible and it merely makes economic growing more possible and easier compared to other factors discussed above.

Walter Bagehot ( 1873 ) and Joseph A Schumpeter ( 1992 ) has shed much visible radiation on the indispensable part of the banking system and economic growing and has pointed out the fortunes where Bankss can press inventions and future growing by placing and funding productive investings.

Banks ( commercial Bankss ) , like any other concerns, purpose to maximise net incomes, that is, they are profit-making establishments, which provide services to concern and persons through a web of subdivisions. These Bankss are in concern to do a net income for their proprietors and they are normally in concern to do a net income for their proprietors and they are normally Public Limited Companies owned by stockholders.

But, in the procedure of profit-making, we can non disregard, the impact it brings on the society or even on an economic system – The proliferation of more concerns pressing more investings, more developments, the handiness, immediate and easy entree to recognition, comfortss brought to people who are in demand of money, countless loan options, in fact, it sets an economic system on a complete different degree in other to thrive and compete and even go a trusty fiscal Centre which will convey more investors, necessarily giving a encouragement to the economic activities every bit good as levelling the criterion of life.

Banks accept sedimentations be it in any sum or signifiers, they keep a % of it as militias and loan out a % of excess. They play a cardinal function in imparting financess to borrowers, investors. Different loan strategies are granted to the people in demand, better services, safeguarding of our money, ATMs, all types of histories merely to supply us with a wages as involvement. Despite being the most conventional, it is besides, the most diversified fiscal mediator.


More empirical surveies on the interactions of economic development across assorted states come from De Melo et Al ( 1996 ) and Havrylyshyn et Al ( 1998 ) who explain the reasonably big fluctuations in growing public presentation seen in the states which have studied.

Goldsmith ( 1969 ) stated that the fiscal construction of an economic system gives a encouragement to economic growing and improves economic public presentation to the extent that it facilitates the channelling of financess to the most fecund and promising enterpriser, i.e. , to the topographic point of the economic system where the financess will be used in order to obtain the best and highest consequences as a whole in the society ‘ . His survey involves both cross subdivision analysis and time-series informations.

More theoretical and empirical literatures have surfaced up refering this thesis. In conformity to Schumpeter work, King and Levine ( 1993 ) developed more theories on the function played by inventions. Fiscal systems move the nest eggs to their most moneymaking utilizations and diversify the hazards associated with these activities. By so making, technological advancement is increased every bit good as the chance of successful invention.

Harmonizing to King and Levine ( 1993b ) , fiscal establishments exert a important portion in specifying the most moneymaking and competitory and promising entrepreneurships and supplying them with the finance required. “ Better fiscal systems better the chance of successful invention and thereby hike economic growing. ”

King and Levine ( 1993 ) carried out their surveies on 77 states for the period 1960-1989. In their arrested development, they besides accounted for other factors impacting growing. They used three growing indexs viz. existent per capita GDP growing, growing in capital stock per individual and entire productiveness growing. They constructed the undermentioned steps of fiscal development viz. liquid liabilities of fiscal system divided by GDP ( which measures the size of fiscal mediators ) , bank recognition divided by bank recognition plus cardinal bank domestic assets ( which measures the grade to which the cardinal bank versus the commercial bank are apportioning recognition ) and recognition to private sector divided by GDP. They found a strong positive relationship between each of the fiscal development indexs and the three growing indexs. King and Levine ( 1993 ) confirm these findings utilizing alternate econometric methods and hardiness cheque. They argued that the fiscal deepness in 1960 is a good forecaster of subsequent rates of growing, capital accretion and productiveness growing. However, while they found that finance predicts growing, King and Levine ( 1993 ) do non turn to the issue of causality. Besides, they concentrated merely one section of the fiscal sector viz. Bankss.

Levine and Zervos ( 1998 ) focused on the stock market. They conducted their survey for a sample of 42 states over the clip period 1976 to 1993. They found that initial degrees of stock liquidness and banking development are positively and significantly correlated with future rates of economic growing, capital accretion and productiveness growing. They argued that nexus between stock markets, Bankss and growing tallies robustly through productiveness growing instead than physical capital accretion.

Bencivenga and Smith ( 1991 ) argue that Bankss guarantee that the best undertakings are fundss even if they require a long-run fiscal committedness. Obsfeld ( 1992 ) argues that the banking sector besides offer the construct of distributing the hazards over the concern. Investings shoud be effected in bigger undertakings compared to single 1s since the hazard is bigger automatically conveying higher returns and this will hike investing and one time once more better capital allotment impacting straight on growing.

The impact the fiscal sector has on economic growing and came out with two relationships that exist between them viz. the ‘supply- taking ‘ and the ‘demand – following ‘ schemes ( Patrick, 1966 ) . Harmonizing to Patrick ( 1966 ) , a well- structured fiscal system will increase the demand of services and therefore, advancing economic development.

Abu-Qarn and Abu-Bader ( 2005 ) conducted a research in Egypt on the relationship between fiscal development and economic growing for the period 1960-2001. They did the Granger causality trials by utilizing the cointegraton and vector rectification theoretical account. They used four different steps of fiscal development ( M2Y, ratio of money stock to GDP ; QMY, the ratio of M2 minus currency to GDP ; PRIVY, the ratio of bank recognition to the private sector to nominal GDP and PRIVATE, the ratio of recognition issued to nonfinancial private houses to domestic recognition ) and long clip series. They conclude that the fiscal sector is of import to better economic development.

In this chapter there has been a theoretical and empirical reappraisal of on the relationship between the banking sector and the economic growing of researches that have been conducted across many states and their decisions have been noted so as to cast more visible radiation on this undertaking. In the following chapter, the positions on the same thesis will be assessed but in respects to instances in the Mauritanian Economy.

The Literature is non yet complete, more information will hold to be added, and this will be done, one time the methodological analysis has started and analysis and findings have started.