Financial Development and Economic Growth in Developing Asia

Gemma Estrada (), Donghyun Park and Arief Ramayandi
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Gemma Estrada: Asian Development Bank

No 233, ADB Economics Working Paper Series from Asian Development Bank

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 economy wide productivity.

Keywords: economic growth; financial development; investment efficiency; sound financial systems; sustaining growth (search for similar items in EconPapers)
JEL-codes: G21 O16 O53 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2010-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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