Examining the Impact of Economic Growth on Financial Development (Comparing Developed and Developing Countries)

Document Type : Research Paper

Authors

1 Associate Professor of Industrial Engineering, Faculty of Industrial Engineering, Amirkabir University of Technology, Tehran, Iran.

2 M.A. of Management, Faculty of Industrial Engineering, Amirkabir University of Technology, Tehran, Iran.

3 Ph.D. Candidate of Agricultural Economics, Faculty of Agriculture, Shahid Bahonar University of Kerman, Kerman, Iran.

10.22103/jdc.2022.19573.1252

Abstract

Objective: Financial development and economic growth are key variables in any economy and in many research their bilateral relationship has been studied and in most literature the effect of financial development on economic growth has been investigated. The purpose of this study is to investigate the impact of economic growth on financial development (comparison of developed and developing countries).
Method: The current research is applied and retrospective in terms of type because it will use the past information of the countries and in terms of reasoning, it is a part of inductive research. Since we will examine and describe the current state of the research subject and examine the relationship between the variables, the current research will be descriptive. Also, regression analysis, which is a subset of correlation research, is used to investigate the relationship between variables. Therefore, the present research will be descriptive-correlation in terms of nature and method. One of the most important requirements of research is obtaining reliable and correct information. Because this information is the basis of future research and judgments. This research is based on the library method. Also, in this research, information related to thematic literature, theoretical foundations, background and records of previous researches about the research topic from library sources and through the study of books and periodicals, articles, theses, including internal sources and Foreign will be collected. The information and data needed to examine and test the research hypotheses have been extracted from the WDI database. in this study, using the annual data from 1990 through 2020, the effect of variables including economic growth, exchange rate, energy consumption, government spending, degree of openness of the economy, inflation and per capita GDP on market-based and bank-based financial development has been studied in 40 countries in two developing and developed groups using the Panel Data method. According to the results, economic growth has a significant effect on the bank-based development of developing countries.
Results: The results showed that in developing countries, economic growth has a positive and significant effect on bank-based and market-based financial development, which indicates a direct relationship between economic growth and financial development in developing countries. The results in the group of developed countries indicated that economic growth has a positive and significant effect on the bank-based financial development index, while it does not have a significant effect on the market- ased financial development index. Also, the results of the Granger causality test showed that in developing countries, there is a one-way causality relationship from economic growth to the bank- based financial development index. The results of this test in the group of developed countries showed that there is a cause and effect and two-way relationship between economic growth and bank-based financial development index, while there is a one-way relationship between economic growth and market-based financial development from financial development to economic growth.
Conclusion: The results show that economic growth affects financial development. Therefore, it can be said a country’s financial sector only spurs at the intermediate stage of Economic Growth trajectory and develops as the economy fully grows. It can also be said that the bank-based financial development index has shown better results than the market-based index. The evidence presented in this study has important implications for policy making. It is imperative for developing countries to pursue prudent macroeconomic policies that reduce inflation while promoting financial development. To ensure higher economic growth on the back of improving the financial sector, developing countries should pursue appropriate fiscal and monetary policies aimed at reducing inflation, while at the same time using financial reform policies to improve overall financial systems. Policymakers should consider a more balanced approach in which financial sector policies aimed at improving EG should be adopted while taking into account the country's inflation rate situation, so as not to jeopardize the overall long-term plan of economic growth. To promote high economic growth, promotion of financial development of an economy should not be neglected and vice versa. Similarly, the role of banks and capital market development in economic growth should not be ignored, and both market-oriented and bank-oriented indicators in the studied countries should be given full attention, because the findings of this study show that and every Two market-oriented and bank-oriented indicators are very important in the economy. The economic growth of these countries and none of them should not be ignored. In addition to the fact that the study countries are more recommended to focus on improving the sub-indicators of financial development, which can even be a bank or stock market index, as a result, it has been determined that each of the sub-indicators is important and contributes to economic growth. Favorable economic growth can play an important role in the development of the financial sector. Because the use of policies that lead to high and stable economic growth is one of the requirements for the development of the financial sector. Short-term financial reforms that strengthen long-term financial development projects should be identified. Similarly, policies that support relatively rising inflation in the short run to fuel booming economic activity, but are sustainable in the long run, will be fruitful in economic growth. Since government spending cuts ultimately boost growth, long-term policies that limit unnecessary government waste but also limit accountability and prudent public management should be put in place. What probably needs to be reduced is the negativity of high government spending and inflation for growth, as the integrity of the financial system needs to be enhanced. Also, this study recommends for future researches that institutional quality and governance should also be considered in order to find the relationship between financial development and economic growth despite the differences in the nature of countries.

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References

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Journal of Development and Capital
Volume 8, Issue 2 - Serial Number 15
December 2023
Pages 31-50

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History

  • Receive Date: 28 May 2022
  • Revise Date: 08 September 2022
  • Accept Date: 14 September 2022

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