Financial Development and Economic Growth in Kuwait

Abstract

Financial development involves improvements in such functions provided by the financial systems as: pooling of savings; allocating capital to productive investments; monitoring those investments; risk diversification; and exchange of goods and services. Each of these financial functions can influence saving and investment decisions and the efficiency with which funds are allocated. As a result, finance affects the accumulation of physical and human capital and total factor productivity-the three factors that determine economic growth. To the extent that financial development reduces informational asymmetries and financial constraints and promotes risk sharing, it can enhance the ability of financial systems to absorb shocks and reduce the amplification of cycles through the financial accelerator lowering macroeconomic volatility and inequality.

Financial markets have developed in ways that allow individuals and firms to diversify their savings, and firms can now raise money through stocks, bonds, and wholesale money markets, by-passing traditional bank lending. The constellation of such financial institutions and markets facilitates the provision of financial services. Furthermore, an important feature of financial systems is their access and efficiency. Large financial systems are of limited use if they are not accessible to a sufficiently large proportion of the population and firms. Even if financial systems are sizeable and have a broad reach, their contribution to economic growth would be limited if they were wasteful and inefficient[1]. Keeping this in mind the researcher had decided to study financial development and economic growth in Kuwait keeping Financial Development Index (FDI) as the measuring stick.