Until the mid-1990s, the role of the financial sector in economic development was largely ignored. Today, research increasingly focuses on the central role of the financial sector in economic growth and therefore in economic development more generally. Further, the importance of law in economic development prior to the early 1990s was largely ignored by most economists. Today, it is very difficult to avoid statements highlighting the importance of law and other institutional structures in economic development. Moreover, it is only more recently that the role of law in the financial sector is beginning to be carefully evaluated and understood. These are all significant developments and underscore the theme of this volume: law, legal institutions and regulatory systems (“legal infrastructure”) are fundamental to financial stability and financial sector development, which, in turn, are essential to economic growth and development.

This chapter discusses the changing understanding of the role of law and the financial sector in economic growth and development. It begins with a discussion of theories of economic growth and development, suggesting that there is an emerging consensus relating to the importance of institutions, including law and legal institutions, in economic growth and development.

Second, the chapter discusses the role of finance in economic growth and development as highlighted by a series of financial crises over the past decade and a half, suggesting both positive and negative aspects.