In contrast, however, Robinson (1952:86) observes the relationship between financial development and economic development is consequential and argues that "where enterprise leads, finance follows.”

Therefore, according to this view, economic development creates a demand for financial services; and the financial system would then respond automatically to provide the required services.

That is, financial systems do not spur growth, but rather financial development simply responds to the development needs of the real economic sector.

This view seems to be consistent with the views advanced by a number of mid 20th Century development economists (Presbisch, 1950; Singer, 1951; Lewis, 1955; Tingergen, 1956; Bauer, 1957; Myrdal, 1957; Hirschman, 1958; Rostow, 1960; and Rosenteiden-Rodan, 1961). None of these stressed the role of finance as a factor prerequisite to economic development, arguing that finance would only be necessary if the other factors of production (namely labour and land) required its use to facilitate their manipulation in production cycles.

The work of Gurley and Shaw (1955) emphasized the importance of financial systems particularly with regard to their mediation role, pointing out that financial deepening was an engine for growth.

They further argued that the creation and expansion of financial systems was vital for economic growth and, consequently, economic development.

From the point of view of economic development, Gurley and Shaw (1955, 1967) contend that financial systems and institutions differ as much in developed as they do among developing countries.

Whereas sophisticated financial systems in developed countries have played their intermediation role effectively and have facilitated the transfer of funds from saving units to investing units, the same cannot be said in developing countries, where such systems are either under-developed or all together lacking.

The recent theory of finance and growth owes much to the work of McKinnon (1973) and Shaw (1973), who contend that the liberation of financial systems plays an important role in spearheading the growth of real sector.

Earlier however, Goldsmith (1969) had espoused a financial liberalisation hypothesis, which maintained that real sector activity benefits from financial deepening as measured by the stock of financial assets to Gross Domestic Product (GDP).

This implies that, the stock of real balances in the economy has a positive influence on the growth rates and as such propagates the necessity for intermediation in the financial sector.

Elsewhere, Hicks (1965) points out that the role of financial intermediation is not only the mobilisation of savings.

He further contends that financial intermediaries in an economy act as a channel (allocation) of communication between potential savings and potential investments.

Such a process is then responsible for increasing output (growth) and thus fostering development.

The Academic Debate on Causation
It was not until the 1970s that the academic literature regarding the role of financial development, fully evolved.

The earliest serious works that attempted to establish the relationship between financial development and economic development is Gerschenkron’s (1966) hypothesis of financial development.

His work attempted to establish a relationship between the development of banking systems and industrialization, arguing that the former played a focal role in the development of the latter.

Gerschenkron (1966) singles out the banking system as the pivotal innovation that facilitated industrialisation, maintaining that such a system availed the required credit for industrial ventures.

Cameron (1972) and Capie and Collins (1992) contend that Gerschenkron exaggerated the deficiencies of capital and entrepreneurship.

They argued rather that most major industrial enterprises had established themselves much earlier than the development of major banking institutions, for instance in Germany.

In his paper, Patrick (1966) analysed the hypothesis advanced by Gerschenkron of bank-based development, by arguing a causation relationship between financial development and economic development in his "supply-leading and demand following hypothesis”.

He noted that both production and wealth accumulation in the LDCs were backward, either because of lack of productive investments or because entrepreneurs in these countries lack the necessary awareness, expertise and skills needed to turn the investment opportunities around in their favour.

He notes that, as the changes in development are ushered into a given economy, entrepreneurs’ awareness is awakened.

Motivated by better returns, such people would change their portfolio holdings from the traditional non-financial mix of land, livestock, durable goods and jewellery, (whose value is rather uncertain and more often than not understated), to more productive capital whose value is denominated in monetary terms.

This would require financial systems to provide the medium of exchange and store of value in the form of financial assets, whose yield is superior to traditional forms of portfolio holdings.

In this way, financial systems and development would serve as a means of reconstituting traditional asset portfolios into modern financial assets.

This would then increase capital formation and savings, making them accessible to many entrepreneurs with viable investment opportunities as opposed to the traditional forms of portfolio mix.

Patrick (1966) argues therefore that "supply-leading finance” would induce development by pooling scarce resources from the traditional non-exchangeable form to an exchangeable and investible form.

He concludes:
"… the creation of financial institutions and the supply of their assets, liabilities and related services in advance of demand for them……has two functions: to transfer resources from traditional (non-growth) sectors to modern sectors, and to promote and stimulate an entrepreneurial response in these sectors, Financial intermediation which transfers resources from traditional sectors, whether by collecting wealth and savings from these sectors in exchange for its deposits and other financial liabilities, or by credit creation and forced savings, is akin to Schumpeterian concept of innovation financing” .

This hypothesis seems to draw credibility from Japan’s industrial development, which was preceded by constitution of a string of banking and financial intermediaries, strategically placed to provide long-term finance that would fund massive investments in industry.

Nevertheless, there seems to be a contradiction in the causation direction between financial development and economic development, which Patrick acknowledges by asserting that financial intermediaries emerge in response to the demand for their services by savers and investors in the real economy, so that, the evolutionary development of the financial system is a continuing consequence of the pervasive sweeping process of economic development (Patrick, 1966)

The author is a Senior Presidential Advisor on Economic Affairs.