Financing Asia's Growth
Peterson Institute for International Economics Working Paper No. 15-3
16 Pages Posted: 2 Apr 2015
Date Written: March 2015
Developing Asia has exhibited rapid growth while saddled with relatively backward financial systems. One might conclude that the coexistence of sustained rapid growth and financial underdevelopment in developing Asia implies that an efficient financial sector is not indispensable for economic development. A more considered view would be that developing Asia grew rapidly despite, not because of, financial underdevelopment. With a stronger and better financial system, it might have grown even faster or achieved the same level of growth with lower savings and investment (and hence a lower cost in terms of forgone consumption). Strengthening the region's financial sectors was made more difficult by the global financial crisis, which gave financial development a bad name. However, in developing Asia financial sector development refers less to the introduction of esoteric products than to the more basic task of building efficient banks and capital markets. There is clearly a positive relationship between financial development and growth up to a certain level of financial development. Although it is possible that the relationship turns insignificant or even negative beyond some threshold, developing Asia is well short of that possible turning point.
Keywords: Asia, financial development, financial inclusion, financial instability
JEL Classification: G18, G28, N25, O16
Suggested Citation: Suggested Citation