DOSE FINANCIAL DEVELOPMENT CONTRIBUTE TO ECONOMIC GROWTH IN DEVELOPING COUNTRIES?

There are ample evidence suggesting that financial sector development plays a significant role in economic development. It promotes economic growth through capital accumulation and technological advancement by boosting savings rate, delivering information about investment, optimizing the allocation of capital, mobilizing and pooling savings, and facilitating and encouraging foreign capital inflows. Countries with better-developed financial systems tend to enjoy a sustained period of growth, and studies confirm the causal link between the two: financial development is not simply a result of economic growth; it is also the driver for growth. At a broader level, a robust and efficient financial system promotes growth by channeling resources to their most productive uses and fostering a more efficient allocation of resources. Financial development also promotes growth by strengthening competition and stimulating innovative activities that foster dynamic efficiency. Financial development comprises of the role of public sector enterprises, legal authorities, fiscal authorities, which are directly or indirectly, affect the financial systems. This paper is concerned with the estimation of econometric model on the impact of financial development on economic growth in developing countries. The data used in this study covers 50 developing countries for 25 years (1994-2014) to measure the relationship between economic growth and the elements of financial development. The data set includes real GDP, labor force, capital stock, domestic credit to private sector, stocks traded, and market capitalization. The source of the data is the various version of the World Economic Outlook, IMF. Capital stock is estimated using perpetual inventory method and the base year is 1970. Empirically, a translog functional form using an unbalanced panel data technique is applied. The results confirm that financial development has a significant positive effect on growth in developing countries. Overall, our evidence supports the notion that further development of the financial sector matters for sustaining growth, which is consistent with the bulk of the existing empirical literature. 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 economic growth with wide productivity.