economic development and economic growth pdf

Economic development and economic growth pdf

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Top 6 Reasons that Economic Development is Important to a Region’s Economy [Infographic]

The Present

Economic growth

Economic development is a critical component that drives economic growth in our economy, creating high wage jobs and facilitating an improved quality of life.

Top 6 Reasons that Economic Development is Important to a Region’s Economy [Infographic]

The purpose of this paper is to examine the relationship between financial development and economic growth for five major emerging economies: Brazil, Russia, India, China and South BRICS during to using banking sector and stock market development indicators.

To begin with, the study first examined some of the principal indicators of financial development and macroeconomic variables of the selected economies. Next, using generalized method of moment system estimation SYS-GMM , the relationship between financial development and growth is investigated. The banking sector development indicators used in the study include size of the financial intermediaries, credit to deposit ratio CDR and domestic credit to private sector CPS , whereas the stock market development indicators are value of shares traded and turnover ratio.

Also, some macroeconomic control variables such as inflation, exports and the enrolment in secondary education were used. The examination of the principal indicators of financial development and macroeconomic variables have shown considerable differences between the selected economies.

Results from the dynamic one-step SYS-GMM estimates confirm that in presence of turnover ratio, all the selected banking development indicators such as size of financial intermediaries, CDR and CPS are positively significantly determining economic growth. Similarly, in presence of all the selected banking sector development indicators, value of shares traded is found to be positively significantly associated with economic growth. However, the same is not true when turnover ratio is regressed in presence of banking sector variables.

Overall, the evidence suggests that banking sector development and stock market development indicators are complementary to each other in stimulating economic growth. A positive association between financial development and growth indicates that the policymakers should take necessary measures toward simultaneous development of both banking sector as well as stock market for inducing growth. The present paper attempts to examine the relationship between financial development and growth using both banking sector and stock market development indicators which has not been attempted before for BRICS.

Also, most of the existing studies are found in case of developed economies. This paper tries to fill this void by studying five major emerging economies. Guru, B. Published by Emerald Publishing Limited. Anyone may reproduce, distribute, translate and create derivative works of this article for both commercial and non-commercial purposes , subject to full attribution to the original publication and authors. Development of an economy requires its financial sector to be developed.

And the development of financial sector happens in the process of founding and growth of institutions, instruments and markets that sustain the huge investments and growth which help in reducing poverty. Accordingly, financial development gives better information about possible profitable investments and promotes optimum allocation of capital.

In other words, the emergence of financial institutions helps in curtailing cost of acquiring information and effectively implements contracts and executes transactions.

Also, the expanding financial access inculcates dynamic efficiency in the system by bringing about a structural change through innovation and welfare gain to the entire economy.

Development of financial system may be defined as the development of the size, efficiency and stability of financial markets along with increased access to the financial markets that can have multiple advantages for the economy.

For instance, a well-developed financial market channelizes the savings of an economy to profitable investments Stiglitz and Weiss, ; Diamond, , reduce information cost thereby leading to better capital allocation Greenwood and Jovanovic, and also reduce the cost of corporate governance Bencivenga and Smith, Also, developed financial intermediaries boost the technological innovation through rewards to the entrepreneurs King and Levine, b.

Further, according to Levine , financial systems assist in trading, diversification, hedging and risk amelioration, apart from facilitating transactions of goods and services.

Also, according to Levine , capital accumulation and technological innovation are the paraphernalia between financial development and growth. The allocation of credit through financial system works as a channel between financial and real sectors, which can be used to finance working capital requirements and investment in fixed capital; the former is used to raise production whereas the latter enhances productivity in the real sector Das and Guha-Khasnobis, However, contrary to above, some economists also have a different perception toward the association between financial development and economic growth.

Further, the global financial crisis of indicates the failure of financial markets which was mainly driven by subprime mortgage lending. Thus, the failure of the economies in monitoring and regulating the evolving financial markets and inability to keep pace with the financial innovation warrants the prudent and sound development of financial markets which may have serious implication for an economy as a whole.

In this context, it is worth noting that very few studies that have examined the finance and growth relationship in BRICS Brazil, Russia, India, China and South Africa have barely studied the impact of banking sector and stock market development on economic growth separately.

Against this backdrop, the present paper endeavors to investigate the relationship between financial development and growth for a panel of five major emerging economies BRICS during to The rest of the paper is organized as follows: Section II presents some principal indicators of financial development and macroeconomic variables of BRICS.

Section III discusses some prominent literature pertaining to financial development and growth. Section IV outlines econometric methodology. Section V discusses empirical findings, and finally summary and conclusion are drawn in Section VI. Figure 1 depicts some principal indicators of financial development and macroeconomic variables of the selected economies during to The principal indicators of financial development used in the study include variables representing both the development of banking sector as well as stock market of an economy.

Banking sector development indicators include:. The stock market indicators include: stock market size SS , a measure of stock market size is measured as total value of all listed shares of stock market as a percentage of GDP;. Economic growth, a macroeconomic variable is measured as per capita income PCI growth Levine, Also, following the existing literature, some macroeconomic control variables used in the study are inflation INF , exports as percentage of GDP and the log of number of enrolment in secondary education of the selected economies.

From Figure 1 , it is observed that the average growth rate of PCI of the selected economies ranged between 1. From Figure 1 , it is observed that the FDP has been increasing since for the selected economies. Similarly, the ratio of commercial bank assets to deposit money bank assets plus central bank assets has increased over the study period.

The average size of the banking sector of South Africa is about The mean CDR of China CPS, another measure of banking sector development, shows that the mean value of the variable for South Africa Next, the examination of the stock market development indicators of the selected economies shows that the mean SS for South Africa is about Further, value of shares traded, a proxy for the stock market liquidity indicates that the mean value of the variable during the study period is about Finally, the mean turnover ratio is found to be highest in China Among the selected control variables, inflation was unexpectedly high for Brazil and Russia in early s which smoothed in subsequent years.

The mean inflation of China is about 4. Next, exports expressed as a ratio of GDP, an indicator of the relative importance of international trade in the economy indicates that the mean value of the variable during the study period is highest in case of Russia Finally, the mean growth of number of enrolments in secondary education is found to be promising in case of India, Brazil and South Africa compared to Russia and China. The seminal exertion by Schumpeter , Goldsmith , McKinnon and Shaw underscores the relevance of financial development for economic growth for some considerable time.

To begin with, Goldsmith sought to investigate first how economic growth leads to changes in financial structure, which is the assortment of financial instruments, intermediaries and markets.

Second, Goldsmith tried to examine the impact of financial development on economic growth. In other words, does the mixture of financial intermediaries and markets functioning in an economy influence economic development. For the first issue, Goldsmith found that development of economies leads to the evolution of and improvements in the financial system.

Particularly, he stated that banks tend to grow bigger relative to national output along with economic development. For the second issue, Goldsmith was not fully successful in evaluating the nexus between the level of financial development and economic growth. In his work, he took a panel of 35 countries using data prior to and documented a positive correlation between financial development and the level of economic activity, but he refrained clearly from drawing causal interpretations from his graphical analysis.

Thus, Goldsmith always refrained from asserting any causal inference that runs from financial development to economic growth. Finally, for the third issue, because of cross-country data limitations, Goldsmith failed to substantiate much on the association between economic development and the combination of financial intermediaries and markets operating in an economy. For example, to begin with, late s and early s, most of the studies attempted to investigate the association between financial development, economic growth and reduction of poverty.

Specifically, subsequent literature has embodied additional findings on the finance—growth relationship and engulfs the wider approach on causal association where cross-country, firm-level and industry-level studies suggest that economic growth is positively driven by a developed financial system. The main contention of structuralists is the quantity, composition and structure of financial variables that prompt economic growth by mobilization of savings, which in turn increases capital formation leading to economic growth thereby reducing poverty Guha-Khasnobis and Mavrotas, They contended that an appropriate rate of return on account of financial liberalization on the real cash balances is a driver of economic growth.

The fundamental principle of their hypothesis is that a low or negative real interest rate will dampen savings which will shrink the supply of loanable funds for investment, which will in turn pull back the growth rate. Therefore, the McKinnon—Shaw model states that financial liberalization will amplify competition, induce an increase in savings by raising interest rates and thereby promote investment and consequently promote economic growth.

After the early debate on the relationship between financial development and economic growth, many subsequent empirical studies using recent data have found mixed results with respect to the association of financial development and growth. Also, later some empirical studies attempted to establish a cause and effect relationship between the two and made an attempt to make certain predictions on the basis of the nature of association. For instance, King and Levine a , using the data for 77 countries over the year period from to , established the presence of statistically significant positive relationship between FDP with growth in real per capita GDP, real per capita capital stock and total productivity, respectively.

However, very recently, Saci et al. However, it was found that in the presence of stock market development indicators, banking sector development negatively influenced economic growth. Recently, Leitao found a positive correlation of financial development with economic growth for 27 European Union Countries and five BRICS countries between and Again, Adusei using dynamic GMM model for 24 selected African countries over the period found a positive relationship between financial development and economic growth.

Further, using pairwise granger causality testing, they supported the evidence of bidirectional causality between financial development and economic growth.

With respect to causality between financial development and growth studies like Jung found a bidirectional causality between real and financial variables on the basis of data collected for 56 countries in the postwar period, including 19 developed industrial economies.

Also, King and Levine a find that financial development is not the outcome of economic growth, rather finance leads to growth. Further, Wachtel and Rousseau stated that financial development does Granger-causes growth. Also, Luintel and Khan found bidirectional causality between financial development and economic growth for a sample of ten economies. Similarly, Wolde-Rufael found bidirectional causality between economic growth and each of the financial development variables.

However, conversely, Demetriades and Hussein conducting causality analysis found little evidence on the causality flowing from financial development to economic growth. They note that causality patterns vary across countries. Further, studies like Levine and Zervos have shown that bank loans to private enterprises as a proportion of GDP, stock market turnover ratio and value of shares traded are robust predictors of economic growth, productivity growth and capital accumulation.

Also, Bhanumurthy and Singh did not find a long-run equilibrium relationship between bank branches and state domestic product for India. Finally, Menyah et al.

As mentioned before, the nexus between financial development and growth is investigated for a panel of five countries, viz. The economies selected in the panel are largely heterogeneous with respect to their geographical region, culture, political and financial structures leading to high variation in explanatory variables to perform the panel regressions. The period of analysis is from to which covers mainly an era of liberalization, rapid economic growth and volatile world markets.

In the present study, real GDP per capita growth PCI is the dependent variable, a proxy which measures the growth of the selected economies. Also, the stock market indicators such as SS, turnover ratio TOR and value of shares traded VT are the selected explanatory variables which measure the stock market development.

All the independent variables barring inflation are expected to have a positive impact on the growth rate. In equation 1 , the dependent variable is lagged, and we have time invariant country-specific fixed effects.

If the country fixed effects in the panel data estimation are omitted, it will lead to biased and inconsistent ordinary least squares OLS estimators in levels Hsiao, Further, several right-hand side explanatory variables can be endogenous.

The Present

Metrics details. For decades, African economies have embarked on financial sector reforms. However, the empirical implications of these reforms have been divergent. This paper investigates the impact of financial development on Economic growth using time series data in Cameroon. Using the Auto Regressive Distributive Lag ARDL technique of estimation, it was discovered that there exist a short-run positive relationship between monetary mass M2 , government expenditure and economic growth, a short run negative relationship between bank deposits, private investment and economic growth equally exists. However in the long run, all indicators of financial development show a positive and significant impact on economic growth.

The purpose of this paper is to examine the relationship between financial development and economic growth for five major emerging economies: Brazil, Russia, India, China and South BRICS during to using banking sector and stock market development indicators. To begin with, the study first examined some of the principal indicators of financial development and macroeconomic variables of the selected economies. Next, using generalized method of moment system estimation SYS-GMM , the relationship between financial development and growth is investigated. The banking sector development indicators used in the study include size of the financial intermediaries, credit to deposit ratio CDR and domestic credit to private sector CPS , whereas the stock market development indicators are value of shares traded and turnover ratio. Also, some macroeconomic control variables such as inflation, exports and the enrolment in secondary education were used.

This overview considers the past, the present, and the future of economic development. It begins with the conceptualization, definition, and measurement of economic development, highlighting that a narrow focus on the economic is inadequate to capture development and even, paradoxically, economic development itself. Key aspects of economic and human development over the past seven decades are then outlined, and the current landscape is described. The paper then considers the future of economic development, highlighting the challenges faced by developing countries, especially the opportunities and risks provided by the recent downward global trend in the share of labor in overall economic activity. What is economic development and how has the concept evolved through the years?


PDF | Mankind today is crossing a difficult, challenging period. After having Keywords: economic growth, development, crisis, liberalization.


Economic growth

House of Representatives. Chairman Brat, Ranking Member Evans, and other members of the Committee, thank you for this opportunity to testify today about the causes of economic growth, the benefits associated with economic growth, and current limits on economic growth in the United States. Faster growth in gross domestic product GDP expands the overall size of the economy and strengthens fiscal conditions. But GDP is not meant to be a measure of economic welfare, and other considerations are important in fully assessing the costs and benefits of policy changes.

In the economic study of the public sector , economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives. The term has been used frequently in the 20th and 21st centuries, but the concept has existed in the West for far longer. Whereas economic development is a policy intervention aiming to improve the well-being of people, economic growth is a phenomenon of market productivity and increases in GDP ; economist Amartya Sen describes economic growth as but "one aspect of the process of economic development".

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In the very first sentence of the book entitled Whose Development? It might seem rhetorical at first, but by no means is it so. Many writers argue that, after six decades of the so called development project aimed at raising the Third World out of poverty and improving the well-being of its citizens, one can speak of anything but true transformation.

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Barro, R. Economic growth, advanced series in economics. Bende-Nabende, A. Foreign direct investment in East Asia: trends and determinants. Bengoa, M. Foreign direct investment, economic freedom and growth: new evidence from Latin America.

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