THE PAKISTAN DEVELOPMENT REVIEW
Financial Liberalisation and Domestic Saving in Economic Development: An Empirical Test for Six Countries
Despite a voluminous literature stressing the importance of financial development in the process of economic growth, a convincing theoretical framework was lacking until the recent publications of McKinnon  and Shaw . Indeed, neoclassical growth theories provide, in the main, a negative role to the monetary process. Here, a reduction rather than an increase in real returns on financial wealth stimulates saving and investment. McKinnon and Shaw both take direct issue with the neoclassical proposition, showing that crucial assumptions in this paradigm are erroneous in the context of less developed countries. McKinnon produces an alternative model in which real money balances are complements rather than substitutes to tangible investment. Shaw rejects neoclassical growth models in favour of the debt-intermediation view which he himself pioneered in the 1950’s.