The finance‐growth nexus enigma: Bringing in institutional context and the productiveness debate

Abstract This paper surveys the literature on the relationship between finance and growth, from the initial simple correlation through debates on causality and channels of impact to the more recent threshold analysis. The gaps in the revisionism regarding the relationship between finance and growth are critically teased out, not least neglect of the effects of speculative finance in developing countries where a positive nexus continues to hold sway in the threshold analysis. The paper argues that the literature has focused on pursuit of a positive nexus, with inadequate attention to institutional context, which is prerequisite for enhancing a positive relationship. It has also narrowed drastically the complexity of cause and effect and ignored broader analytical approaches to the relationship between finance and growth. The classical political economy debate on finance productiveness is drawn upon, in which positive contribution is based on real output, as a critical point of departure for why greater emphasis ought to be placed on institutional context to enhance the contribution of finance to growth.