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Press, Journal Article
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But unfortunately, we are still struggling with perhaps the most important lesson. In our quest
for well-being, the dream of finance-led growth has still not been replaced with more realistic
policies. As memories of the crisis fade, decision makers are once again pushing for finance to
produce illusionary wealth.
Today, I want to talk to you about the dreams and the reality of finance-led growth - about what
finance can deliver, and what not.
2
Old temptations … and relapse into old patterns?
Immediately after the financial crisis struck, stringent financial market regulation was
considered to be the silver bullet to end the excesses of the financial industry. The idea was that
strict rules would end banks' risky behaviour to ensure they never again take down entire
economies with them.
As memories of the crisis fade, this attitude is becoming less visible. The general public and the
policy makers are faced with other, more pressing worries - in the economic sector these are,
notably, concerns about growth. In this context we refer, in particular, to emerging market
economies such as South Africa and China, as well as to the euro area. We bemoan low growth
levels because growth is seen to be the main source of jobs and prosperity.
Unfortunately, this policy logic causes us, time and again, to seek a quick fix - fast, easy-to-
understand and convincing solutions. This makes the finance-led growth dream the ideal mantra.
3 The dream of finance-led growth
Greater growth through increased credit and enhanced financial market activity has long been an
attractive policy idea. It is held to be a magic formula for economic development, the rationale
being that higher levels of debt and liquidity at financial institutions lead to increased lending.
This, in turn, promotes investment and therefore growth and so, finally, economic development.
All too often, policy decisions are driven by this seductive notion - or by fear of missing out on
the growth that's been promised. The problem with this idea, however, is that it's flawed. Which
makes finance-led growth a truly dangerous dream.
Believing the dream that greater growth is created by the financial markets, there are many who
would like to see financial institutions given kid-glove treatment - meaning that credit
institutions should be subjected to less stringent regulation and supervision.
We saw something along those lines before the last financial crisis. Calls for bigger and more
liquid financial markets that encourage investment and lending to the private sector, thereby
leading - so the idea goes - to more growth, put deregulation and lenient supervision on the
policy agenda.
Economic theory and empirical evidence backed up this policy. Various studies pointed to a
positive correlation between the volume of loans granted to the private sector and economic
development
[1]
These results would appear to confirm the finance-led growth dream. I will
come back to this.
But is the situation the same for advanced economies on the one hand and emerging ones, like
South Africa, on the other? Well, not entirely. For these economies, experts and policy makers