Financial development and economic growth: evidence from emerging African and Asian countries
Tesfamlak Gizaw, Zerihun Getachew, Malebo Mancha
Abstract
The connection between financial development (FSD) and economic growth has been the focus of both theoretical and empirical research. However, the specific nature of this relationship depends on factors such as the level of economic development, the extent of financial activities, and integration into the global financial system. The aim of this study is, therefore, to investigate the link between FSD and economic growth in the context of 22 emerging African and Asian countries. And both descriptive and econometric analyses were conducted using panel data from 1981 to 2021. Besides, the study used the Dynamic Common Correlation Effect (DCCE) model, which takes into account cross-sectional dependency, allows for parameter variation, and combines the characteristics of both MG and PMG. The descriptive results indicate that emerging Asian countries have a relatively higher FSD level than emerging African countries, with the average FSD for the sampled emerging countries being 23.74 percent; for emerging Asian countries, it is 30.98 percent; and for emerging African countries, it is 17.71 percent. Furthermore, the econometrics results show that FSD has a positive but negligible influence on the growth of emerging Asian and African nations, suggesting that although there is rapid and sustainable growth, the current level of FSD is insufficient to sustain this trajectory. Thus, among the crucial policy options that policymakers should implement to improve financial sector development and sustain economic growth in emerging African and Asian countries are strengthening institutions, financial openness and liberalization, improving technologies, and digitalizing economies.