Financial developemnt and economic growth in ten Asian countries

Abstract

Financial-sector-derived economic crises happened recently in Asia area and in Vietnam create a question about the growth-promoting role of financial system against the economy. After reviewing the theory of growth-finance nexus and many empirical studies about the link between financial development and economic growth, this paper is implemented to examine whether financial development really promotes economic growth in Asia including Vietnam and its nine neighboring nations. Collecting data of ten Asian countries over period from 1980 to 2012 from IMF and World Bank and using econometric analysis method are the tools used in this report. Due to the inadequate data of Vietnam before 1986 and of some other developing countries, the analyzed data is unbalance panel form. GDP per capita growth is proxy for economic growth which is dependent variable in the regression model. The indicators for financial development which is the main studied object in this paper include the ratio of private credit to GDP, the efficiency of financial institutions measured the spread between saving rate and lending rate, capital inflows as share of GDP and the ratio of total market value of all listed companies to GDP. Besides, the regression model is added some control independent variables consist of the inflation rate measures the less stability of economies, and the two variables whose values measured in percentage against GDP: ratio of foreign trade to GDP and expenditure of Governments divided by GDP. The regression result of Fixed Effects model affirms all four indicators of financial development promote economic growth. The private credit is significantly necessary for growth. The relationship between private credit ratio and economic growth is quadratic. The increase in stock market capitalization leads to increase in investment in turn fosters growth. While financial openness promotes economic growth significantly. Lastly, the narrow of spread between lending and saving rates lowers the cost of investment so investment increases, in turn economic growth is accelerated.