Making Abundant Natural Resources Work for Developing Economies

its function of resource allocation it is envisaged that the financial system would beable to redirect mineral revenues to viable investment opportunities in the non-mineralsectors of the economy that would lead to a sustainable growth.In seeking to understand the relationship between finance and growth, two schools ofthought have emerged. There is the ‘supply-leading’ view and the ‘demand following’view. According to the former view, a developed financial sector is necessary forattaining high rates of economic growth. 9 A growing economy is able to generate newand additional demands for financial services, which in turn prompts a ‘supplyresponse in the growth of the financial system’ (Patrick (1966)). If this holds true,then this implies that the lack of well developed financial systems in less developedcountries is an indication of lack of demand for such.Conversely, the ‘demand-following’ view asserts that growth in the real sector leadsto the development of the financial sector. A rapid growth in real national income willtend to prompt a higher demand for external funding (what others have saved), thus aneed for financial intermediation. Financial intermediation will be important fortransferring saving between individuals and from slow growing sectors to fastgrowing ones. Thus the intermediation can be used to sustain and support leadingsectors in the growth process.On the basis of these two views, the question of whether a developed financial systemprecedes economic growth has led to more empirical examination of the issue.9Even though it is necessary to have a developed financial market to attain high economic growthrates, the supply-leading finance cannot be said to be a precondition for achieving ‘self-sustainedeconomic development’ (Patrick, 1966, p. 176). The view rather presents a way of inducing real growththrough finance.