Financial Development and Economic Growth in Developing Asia

63 Pages Posted: 31 Jan 2011

See all articles by Gemma Bolotaulo Estrada

Gemma Bolotaulo Estrada

Asian Development Bank - Economic Research

Donghyun Park

Asian Development Bank - Economic Research

Arief Ramayandi

Asian Development Bank - Economic Research

Date Written: November 2010

Abstract

Economic theory suggests that sound and efficient financial systems - banks, equity markets, and bond markets - which channel capital to its most productive uses are beneficial for economic growth. Sound and efficient financial systems are especially important for sustaining growth in developing Asia because efficiency of investment will overshadow quantity of investment as the driver of growth in the region. The data indicate that the region’s financial systems have become deeper and more diversified since the early 1990s. A more formal econometric analysis on a panel data of 125 countries confirms that financial development has a significant positive effect on growth, especially in developing countries. The results also indicate that the impact of financial development on the region’s growth is not noticeably different than elsewhere, and the impact has weakened since the Asian financial crisis. Overall, our evidence supports the notion that further development of the financial sector matters for sustaining developing Asia’s growth in the postcrisis period. However, the primary role of financial sector development in growth is likely to shift away from mobilizing savings, thus augmenting the quantity of investment toward improving the efficiency of investment, and thereby contributing to higher economywide productivity.

Keywords: Financial sector, economic growth, investment, banks, equity markets, bond markets, Asia, panel data

JEL Classification: O40, O47, E22, G10, G20

Suggested Citation

Estrada, Gemma Bolotaulo and Park, Donghyun and Ramayandi, Arief, Financial Development and Economic Growth in Developing Asia (November 2010). Asian Development Bank Economics Working Paper No. 233, Available at SSRN: https://ssrn.com/abstract=1751833 or http://dx.doi.org/10.2139/ssrn.1751833

Gemma Bolotaulo Estrada (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Arief Ramayandi

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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