Abstract
This study investigates the role of financial and institutional development on economic growth in the Association of Southeast Asian Nations (ASEAN) economies from 1995 to 2017 using a dynamic panel estimator. Financial development is instrumental in promoting economic growth; however, the effect of financial institutions and financial markets can differ. In recent years, the ASEAN economies have launched financial and institutional integration initiatives towards the goal of an integrated ASEAN Economic Community, which can have a profound impact on economic growth. The estimated results show that financial institutions are positive and significant towards economic growth, while financial markets are insignificant. Equally important, institutional quality plays a significant and positive role in economic growth. More interestingly, the study finds that institutional development is complementary to financial institutions and markets. Member states should emphasise on further financial integration across the ASEAN economies, allowing for the development of financial institutions and markets alongside improvements in institutional quality to increase the effectiveness of financial development.
Highlights
The Association of Southeast Asian Nations (ASEAN) economies have grown considerably, doubling its share of the world’s gross domestic product (GDP) from 3.3 per cent in 1967 to 6.2 per cent in 2016 (World Bank), making it the sixth-largest economic group in the world
The fi exhibits a stronger correlation with y, compared to fm, which suggest that the effects of financial institutions may be more effective in spurring economic growth
In recent years there is a body of literature that suggests a weakening relationship between financial development and economic growth, due to excessive financial liberalisation alongside the absence of strong institutional
Summary
The ASEAN economies have grown considerably, doubling its share of the world’s gross domestic product (GDP) from 3.3 per cent in 1967 to 6.2 per cent in 2016 (World Bank), making it the sixth-largest economic group in the world. An important part of the initiative involves financial development and integration efforts in the region in order to promote further economic growth. There is a consensus that financial development promotes economic growth, through the seminal work by King and Levine (1993) alongside many consequent empirical studies. A number of studies have suggested that the role of finance in economic growth is weakening and, in some cases, negative, as there may be other factors, such as institutional quality that influences the positive effects of finance on growth (Breitenlechner et al 2015; Rousseau and Wachtel 2011). The initiatives of the ASEAN economies to push financial development and integration make it a compelling study for the examination of the relationship between finance and growth, as there are recent studies that provide evidence against the positive effects of finance
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