Nonlinear relationship between economic growth and nuances of globalisation with income stratification: Roles of financial development and governance

Abstract

We study the effect of overall globalisation on economic growth in a neoclassical macroeconomic growth model. We further assess our model by considering the decomposed measures of globalisation including economic, political, and social globalisation components. To this end, we estimate panel data models by applying the cross-sectional dependency-autoregressive distributed lags (CS-ARDL) approach to a sample of 116 countries during the available period, 1980–2015. We classified our sample into upper middle-, lower middle-, and high-income groups to minimise country-specific heterogeneity. Our results affirm the presence of a quadratic (nonlinear) U-shaped relationship between the overall globalisation (including the economic, political, social components) and economic growth for the lower middle- and upper middle-income group. However, they provide evidence of a positive linear relationship between globalisation and economic growth for the high-income countries. Given the arguments that the impact of globalisation on growth is conditional on local financial development (FD) and quality of governance (QoG), we incorporate their role. We provide fresh evidence that the impacts of globalisation on economic growth are more profound in the countries with a higher QoG and a higher deepening of FD. We further check the robustness of our analysis applying the U test and dynamic generalised methods of moment approach. We also provide policy implications.