Abstract
The drivers of economic growth and development are among the most important issues explored by economic theory. Sustainability of economic development was previously linked by various economic schools of thought to natural resources (agriculture, land, minerals, metals etc.), labor force (including skills, productivity, and education), entrepreneurship or technology and innovation. Capital was later introduced by classical economic theory as the key element. Without significant capital accumulation, all other production factors remain idle. The value added of the production process is a result of the existence, the accessibility and the cost of capital. Therefore, the development and the sophistication of the financial sector has gradually become very important for any nation interested in sustainable growth. This paper investigates the impact of financial sector development, sophistication and performance on economic growth based on a panel regression methodology. We found statistically significant results that confirm the importance of this connection and that are very consistent with economic theory and previous relevant articles and studies.
Highlights
Economic development is one of the central issues explored by economic theory
The quality of financial institutions, of regulations and regulatory bodies, the market sophistication and competition significantly improve the cost of capital and tend to lower the risks associated with various financing options
Our empirical research aims to explore the influence of financial system development, sophistication and performance on the economic growth based on a panel data research framework
Summary
Economic development is one of the central issues explored by economic theory. Economic development is a broader concept than economic growth, comprising very complex mechanisms for distributing the wealth from economic growth and giving importance to various social aspects. Understanding the main drivers of sustainable growth of a nation is important for finding sound solutions to business cycles, for the identification of the most appropriate anti-cyclical public policies and for the enforcement of regulations and institutions in this respect. The aim of this paper is to investigate, based on a quantitative analysis (panel data regressions), the importance of financial system development and sophistication for sustainable economic growth. In our model we propose three different dimensions for financial system development and inclusion: (1) financial system development, (2) financial system sophistication and accessibility, and (3) financial system performance, with each of these described by the relevant quantitative and qualitative variables. Many of studies are focused on the impact of financial inclusion (financial market accessibility) and less on the impact of financial market growth and development or the impact of the financial system’s performance on economic growth
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