Economic growth, corruption, and financial development: Global evidence

Abstract

Using panel cointegration and panel error correction models from 2002 to 2016, this paper investigates the relationship among corruption, economic growth and financial development in 142 countries in the long run. In order to make the conclusion more targeted, the samples are further divided into developed countries subsample and developing countries sub-sample. The results confirm that between GDP, COR and BM, a long-term cointegration relationship exist in the full sample and the sub-samples of developing countries. Moreover, in the full sample and in developing countries subsample, the panel FMOLS estimations indicate that economic growth has a positive effect to financial development, whereas corruption has a negative effect. The VECM shows the causal relationships exist between economic growth to financial development and corruption to financial development in the long run. But for developed countries the causalities are absent. The policy implication is that, for developing countries, boosting economic growth and can help promote financial development but curbing corruption has adverse effects on financial development. The policy effects are related to the prosperousness of different countries. Overall, developing countries can carry on policies to advance financial development through promoting economic growth and indulging corruption temporarily, while developed countries may have to find other channels.