Financial Structures and Economic Development: Empirical Evidence from BRICS Countries and Mauritius

Abstract

This empirical study analyzes the implications of financial structure for country’s economic development. In recent years a considerable attention is paid to this issue in the scientific literature, however, there is a lack of empirical studies on this issue, especially investigating the relationship between the structure of financial system and economic development. The aim of this paper is to investigate empirical link between the structure of financial system and economic growth in BRICS countries. By applying the pooled mean group estimator to a large panel up to 6 countries over the 1980–2012 periods, this study finds that financial structure is significantly cointegrated to both Financial Development and economic growth. In particular, the relationship is positive in nature, suggesting that more market-based countries enjoy faster economic growth but suffer more from economic fluctuations in the long run. Accordingly, in sharp contrast to the existing evidences, we conclude that the architecture of an economy’s financial system matters for real sector performance. Based on the research results it can also be stated that the relationship between the structure of financial system and economic development exists, i.e. the level of country’s economic development is higher in countries with market-based financial system. It can also can be stated that countries that can be characterized by mixed and market-based financial systems are better economic developed. As policy recommendation, the banking sectors of all the countries must be further developed since its indicator suggest a very significant positive relationship between banks and economic growth. The channel through which credit is given to the private sector must be further enhanced and this can be a policy measure for banks. In conducting this study, we found out that BRICS and Mauritius are more bank-based economies but nevertheless, stock markets also contributed to economic growth. So, a recommendation would be that the stock markets in these countries be given a boost to be developed so as to further enhance economic development, hence helping them to gain more weight on being developed. It can be anticipated that financial development will play a more prominent role in the overall economic performance in the future; however, these economies should be able to get the right mix of their financial structure.