Financial Development and Economic Growth in Emerging Asian Countries

Many countries removed constraints on goods, services and capital gradually after fall of Bretton Woods system and globalization of financial markets accelerated especially as of 1980s. This process contributed to the development of financial sectors in many countries. Therefore many studies have been conducted about the possible effects of financial sector on major macroeconomic variables in recent years. This study investigates the possible effects of financial sector development on economic growth in emerging Asian countries during the period 1992-2011 by panel regression. We found that various indicators representing the development of banking sector and stock market had positive effect on economic growth in emerging Asian countries.


Introduction
Financial sector essentially composes of establishments which are an intermediary between economic units with fund surplus and economic units with fund deficits.The financial intermediary and financial instruments have developed significantly over time in parallel with technological progress and economic development.Financial sector also enables economic units to hedge against various risks and to smooth their intertemporal expenditures.Therefore financial sector has become a key component of economies over time.However development level of financial sector varies substantially depending on economic development level of countries.Countries with higher economic development level generally have higher financial development.
The theoretical studies on the relationship between development of financial sector and economic growth traced to Bagehot (1873).Bagehot (1873) emphasize that capital mobility was crucial for economic growth.Then Schumpeter asserted that financial intermediaries contributed to the technological progress and economic development by mobilizing funds, facilitating the trade of goods and services, risk management, project and manager evaluation (King and Levine, 1993).Levine (1997) demonstrated that financial sector had effect on economic growth by accumulation of capital and technological advance in context of the endogenous growth models.Meanwhile many empirical studies for example Goldsmith (1969) and King and Levine (1993) indicated that there were high correlation between economic growth and development of financial sector.On the other hand Robinson (1952) and Lucas (1988) contradicted with Bagehot and Schumpeter. Robinson (1952) asserted that economic growth led financial development.Lucas (1988) indicated that the economists overemphasize the effect of financial sector development on economic growth.
Emerging Asian countries have been the countries among the most rapid growing countries in the world in recent three decades and they experienced significant economic growth rates except the crises times such as 1997 Asian crisis and the Global financial crisis.Their financial sector also has developed during the economic expansion especially since early 1990s.This study investigates the role of development of financial sector on economic growth in Emerging Asian markets (China, India, Indonesia, Korea, Malaysia, Philippines, Thailand) during the period 1992-2011 by panel regression.
In the rest of the study we will review literature on the relationship between development of financial sector economic growth in the Section 2 and give information about data and presents econometric application and main findings in the Section 3 and conclude the study in the Section 4.

Literature Review
There have been extensive studies on the possible effects of development of financial sector including development of banking sector and stock market on economic growth in the literature.In these studies, money and quasi money (M2), liquid liabilities of the financial sector (M3), total assets of deposit money banks (commercial banks and other deposit taking banks), domestic credit to private sector and interest rate spread have been generally used for the development of banking sector, while total stock market capitalization, value traded and turnover ratio have been used for the stock market development.On the other hand real GDP growth rate and growth rate of real GDP per capita have been used for the economic growth.
The studies on the effects of development of financial sector on the economic growth have reached mixed findings as seen in Table 1.Most of the studies have reached the finding that development of financial sector has had positive effect on economic growth and there has been unidirectional causality from development of financial sector to economic growth.But however some empirical studies such as Kagochi et al. (2013), Yıldırım et al. (2013) and Hakeem and Oluitan (2013) found that there has been unidirectional causality from economic growth to financial development.On the other hand relatively few studies such as Adusei (2013) and Al-Malkawi et al. (2012) found that development of financial sector has had negative effect on economic growth.

Panel data analysis
He found that development of financial sector affected the income level positively.

Data
We examined the possible effects of development of financial sector on economic growth in emerging Asian countries by using panel regression.Our data cover 7 emerging Asian countries during the period 1992-2011 and the data was obtained from the Financial Development and Structure Database and the World Development Indicators (World Bank, 2013a& 2013b).We used the growth of GDP per capita as an economic growth indicator.We took deposit money bank assets to (deposit money + central) bank assets, liquid liabilities to GDP, private credit by deposit money banks and other financial institutions to GDP, money and quasi money (M2) as % of GDP, stock market capitalization to GDP, stock market total value traded to GDP (%), stock market turnover ratio and number of listed companies per 10K population as indicators of development of financial sector.The variables, their symbols and their sources were presented in Table 2.We used Eviews 7.1 and Stata 10.0 statistical packages in the econometric analysis.

Econometric Application and Findings
The variables used in the panel data analysis should be stationary as in all the time series analyses to avoid causing possible spurious relationships among the variables.Therefore we tested common unit root process by Levin, Lin ve Chu (2002) test and tested unit root process for every unit (country) by Im, Pesaran ve Shin (2003).We tested stationarity in the series independent from units by Augmented Dickey Fuller (ADF) (1979) test.We found that all the variables were not stationary at level.So each variable was deseasonalized by Tramo/Seats and we took first difference of the variables to eliminate trend effect.We found that all the variables became I(1) after first differencing.The results of the panel unit root tests were given in Table 3. Panel data analysis is implemented by fixed and random effects as specified in Baltagi (2004).We applied some statistical tests to determine which estimation method we use in the analysis.The main issue is whether the data will be pooled among the countries and the periods because all the variables in the model may be varied among the countries and the periods.We used Chow test to determine common significance of country specific effects and time specific effects.Here effective estimator under null hypothesis is pooled ordinary least squares, while effective estimator under alternative hypothesis is fixed effect model (Berke, 2009:41).We used Chow and Breush-Pagan (BP) tests to determine which panel regression model would be used and the results of the tests were presented in Table 4. Null and alternative hypotheses for BP tests respectively pooled regression and random effects model, while null and alternative hypotheses for Chow test respectively are pooled regression and fixed effects model.Autocorrelation is an important problem in the panel data analyses as in all the time series.One of the main assumptions of the regression analysis is that there should be not the relationship (correlation) among the same error terms for the different observations.If the error terms are interrelated, this is called as autocorrelation or serial correlation (Greene, 2011).We tested the autocorrelation in the data set by Woolridge (2002) autocorrelation test.The test result was presented in Table 7 and the null hypothesis, which states that there is no autocorrelation, was rejected according to the test results.In other words there was no autocorrelation among the error terms.

Conclusion
The process of financial globalization accelerated especially during 1990s and 2000s.The financial sectors of emerging Asian countries developed significantly during the process of financial globalization and they experienced significant economic growth rates and converged towards developed countries, although they were hit by Asian financial crisis in 1997 and 2008 global financial crisis.We investigated the possible effects of development of financial sector on economic growth in emerging Asian countries during the period 1992-2011 by using panel regression analysis.

Table 1 .
Literature review

Table 2 .
Variables used in the econometric analysis and their symbols

Table 3 .
Results of panel unit root test

Table 4 .
Test results of panel regression estimation method Hausman test to decide whether we use random effects model and fixed effects model.In this test null hypothesis is that there are random effects, while alternative hypothesis is that there are not random effects.The results of Hausman test were presented in Table5.Hausman test results demonstrated that alternative hypothesis was accepted.So we used fixed effects model in the analysis.We used different algorithms for the analysis and the estimation results of the model obtained by panel-corrected standard errors (PCSE) algorithm which had minimum value of total squared error and the results of panel regression were presented in Table6.We found that all the variables except DM2 and DLISTCO_PC were statistically significant and had positive effect on economic growth.Moreover our explanatory variables explained 78.5% of variation in dependent variable (real GDP per capita growth).Our findings are consistent with the general trend in the literature.Financial sector development contributed to the rapid economic growth in emerging Asian countries during the 1990s and 2000s.1% increase in DBACBA, LLGDP, PCRDGDP, STMKTCAP respectively caused 13.57%, 6.99%, 4.82%, 4.76%, increase in the economic growth.

Table 7 .
Results of Woolridge autocorrelation testOn the other hand heteroscedasticity was tested by Greene heteroscedastic test and the test result was presented in Table8.hypothesis,which states that there is no heteroscedasticity, was accepted according to the test results.

Table 8 .
Results of Greene heteroscedastic test