Financial Sector Development Research Articles

Financial sector development, trade and income inequality: regional perspectives using evidence from macro and firm-specific data

PurposeThe purpose of this study is to firstly, find out does the relationship between finance, trade and income inequality provides matching evidence using the macro- and firm-level data? Secondly, whether a causal relationship from the firm-specific data can be established.Design/methodology/approachThe authors employed a panel data fixed effect regression and two-stage least square (2sls) using key instruments. Their analysis is conducted based on a sub-sample analysis that emphasizes Latin America Region (LAR), Africa (AFR) and Asia by merging South Asia, East Asia and Pacific Regions (SEAR). These areas are characterized by an unequal society represented by a mounting gini index (Robilliard, 2020; De Rosa et al. 2020). Accordingly, the authors estimated a comparable model to unfold the impact of finance and trade. Besides, the authors exploited the interaction between their predictors with labor productivity and ownership structure to claim the difference between the results using the two data sets. The effort to establish a causal relationship from the combined firm-level data challenges the current literature that leans towards either macro or micro perspectives.FindingsThe result obtained from macro-level data shows that while financial development widens income inequality, the impact of trade on income inequality is negative. However, the estimation result from the combined firm-level data portrays that the proportion of investment financed by banks and trade widens income inequality. Given the contrasting result concerning trade, the authors test whether the firm-level evidence is causal following different identification strategies. The exercise shows that the correlation presented in the paper is causal. That challenges the current literature that falls short of providing firm-specific evidence.Social implicationsThe authors adds to a growing body of literature on finance, trade and income inequality by paying due emphasis on firms from 2006 to 2020. The authors show the private sector development effect on income inequality by linking topics from the firm and country-level data.Originality/valueThe authors extend the macro-level discussion and contribute to the existing literature by offering firm-specific evidence on the relationship between finance, trade and income inequality.

Repercussions of Hydroelectricity use on Carbon Emissions in Bangladesh: Evidence using Novel Fourier-Bootstrapped ARDL and Fourier-Gradual Shift Causality analyses.

Bangladesh has recently pledged at the 26th Conference of Parties (COP26) to reduce its carbon dioxide emission figures by 22% at the end of 2030. However, since this South Asian country has always turned to fossil fuels for electricity generation purposes, achieving this emission reduction goal is a challenging task for the Bangladesh government. Nevertheless, considering the negative environmental implications associated with the generation and consumption of unclean energy, particularly electricity, it is critically important for Bangladesh to expedite the process of clean transformation of its traditional pollution-intensive power system. Hence, the objective of this study is to dissect the repercussions of hydroelectricity use on Bangladesh's fossil fuel consumption-related carbon dioxide As opposed to the traditional method of quantifying environmental quality using total carbon dioxide emissions, this study considers Bangladesh's annual carbon dioxide emissions generated from the combustion of gas, oil, and coal. Besides, novel Fourier-based econometric methods that effectively handle structural break problems in data are utilized in this study. Based on the results, it is found that up-scaling hydroelectricity consumption levels exert emission-inhibiting effects while greater economic globalization activities are witnessed to boost the emissions. More importantly, hydroelectricity consumption and economic globalization are observed to jointly curb fossil fuel consumption-based emissions of carbon dioxide. Additionally, the results verify the environmental Kuznets curve hypothesis for Bangladesh. Furthermore, financial sector development is found to be effective in reducing the natural gas consumption-related carbon dioxide emissions while urbanization is held responsible for amplifying emissions generated from all three types of fossil fuels. Therefore, considering these findings, the Bangladesh government needs to particularly emphasize scaling up production and consumption of hydroelectricity to decarbonize its economy.

Role of energy consumption and trade openness towards environmental sustainability in Turkey.

The growth of financial services has been critical in Turkey's pursuit of economic growth objectives throughout the last two decades. Nevertheless, it cannot be denied that it has a negative impact on environmental quality. Based on this, in the current paper, the effect of energy use, trade openness, and financial development on the load capacity factor (LCF) is explored for Turkey between 1965 and 2018. In doing so, a series of quantile approaches such as quantile cointegration (QC), quantile-on-quantile regression (QQR), nonparametric causality-in-quantiles (NCQ), and quantile regression (QR) are used. The results generated from the QQR and also validated by the QR reveal that in the majority of the quantiles, primary energy use, trade openness, and financial development impact the LCF negatively. These results suggest that primary energy use, trade openness, and financial development damage environmental quality. Furthermore, the findings gathered from the quantile causality disclose that all primary energy use, trade openness, and financial development can forecast LCF in the majority of the quantiles. Based on the research outcomes, policies, which may aid to solve the damaging environmental effects of the primary energy use, trade openness, and financial sector development in Turkey are recommended.

Revisiting the linkage between financial inclusion and economic growth: Time series evidence from Vietnam

Financial inclusion has played a key role in encouraging the development of financial sectors in recent decades. Only a few studies, however, have looked at the linkage between financial inclusion and economic growth. This study examines the impact of financial inclusion on economic growth in Vietnam, utilizing data spanning the period from 2001 to 2021. The study uses composite risk, trade openness, and government expenditures as control variables. The study follows the access to finance theory, which suggests that access to financial services such as credit, savings, and insurance can help promote economic growth and development. The nexus between financial inclusion and economic growth has never been examined in the case of Vietnam, which represents a greater share of global trade and income. Moreover, this study uses trade openness, government expenditures, and the composite risk index as control variables in the empirical model. Hence, the study contributes to the existing literature in some meaningful ways. This study employs the FMOLS method to estimate the long-run coefficients of financial inclusion, trade openness, composite risk, and government expenditures. According to the findings, financial inclusion boosts economic performance. On the contrary, composite risk is negatively related to economic growth. The results of this study suggest that Vietnam must implement policies to improve financial inclusion so as to enhance its economic growth.

Analyzing the differential impacts of financial sector development on remittance inflows

This study investigates the financial development and remittances nexus using a panel of 84 countries at all levels of income over the 1995 to 2018 period. We employ a dynamic commonly correlated effects estimator (DCCE) for a heterogeneous panel data model with weakly exogenous regressors to investigate the impact of financial development on remittances using indices that cover all aspects of the financial sector development (overall, institutional, and markets). The results indicate the importance of the development of the financial sector for remittance inflows, regardless of the motives. Our findings generally support the notion that improving the financial sector positively influences the magnitude of remittances for lower-income countries but not high-income countries. To attract more remittances, policymakers of low-income countries may implement policies that improve the development of the financial sector.

The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach

The relationship between financial development indicators and non-performing loans (NPLs) has garnered significant attention, especially in emerging countries. The puzzle of whether financial sector development increases or decreases Non-performing Loans (NPL)s has not been resolved to the satisfaction of the curious mind. This research attempts to answer the above question by studying the asymmetric and symmetric association between financial sector development and NPLs, by utilizing the novel non-linear autoregressive distribution lag (NARDL) and the linear autoregressive distribution lag (ARDL) approach. Moreover, to make the study inclusive, we have added a series of proxies to measure financial sector development and macroeconomic vulnerabilities. Our main findings confirm that financial sector development and NPLs move together in the long run, and there is significant evidence of the asymmetric relationship. We infer that NPLs react differently to the negative and positive shocks of financial development and macroeconomic variables both in the short and long run. In the long-run positive shocks in financial intermediation, banking efficiency, banking depth, banking stability index, and banking non-interest income significantly impact the NPLs in emerging countries. The positive shocks of financial sector development (financial intermediation and size of banks) increase NPLs in emerging countries and vice-versa. Furthermore, regarding the macroeconomic variables, the positive shock of inflation, unemployment, and interest rate positively affect NPLs. The empirical analysis also concludes that in the long-run foreign bank presence is an insignificant factor affecting NPLs in the selected countries. This study emphasizes that, unlike the linear model, the non-linear model provides a more realistic and robust result by highlighting hidden asymmetries, which will help policymakers make appropriate strategic decisions.

Financial Development, Renewable Energy and Unemployment in North Africa

Purpose: The study examined the nexus between financial sector development, renewable energy usage and unemployment (UNEMP) in North African countries. The complementarities between (1) financial development (FIN) and renewable energy usage and (2) economic growth and financial development, and their influence on unemployment was also investigated within the context of North African countries.
 Design/Methodology/Approach: Panel data (1992-2019) analysis methods such as fixed effects, fully modified ordinary least squares (FMOLS) and pooled ordinary least squares (OLS) were used.
 Findings: Financial sector development had a significant unemployment reduction influence. Complementarity variables were also noted to have significantly reduced unemployment.
 Implications/Originality/Value: North African countries should therefore craft, develop and implement financial development, renewable energy usage (RENEW) and economic growth enhancement strategies and policies to increase job creation capacity.

Neoliberalism and its criticism by well-known defenders of the market order

The article critically examines the philosophy of neoliberalism. The author finds a wide destructive potential of neoliberalism for society and the state. The privatization promoted by the neoliberal ideology, the withdrawal of the state from the economic and social spheres, the rejection of protectionism have a negative impact on the development of the economy and on the standard of living of society. The economic freedom exalted by liberal philosophy makes it possible for speculative activity to develop. Ethical foundations are undermined by the substitution of personal responsibility for social protection. Liberal philosophy creates numerous myths, with the help of which an ideological defense of the growth of inequality and many other socially unacceptable results of the functioning of the liberal economic and political system is built. The article proves the mythological nature of liberal theses about free competition and equality of chances, about hard work as the key to success. The unreasonableness of pairing neoliberalism with democracy is postulated. Anti-democracy seems to be inherent in neoliberalism. The social disfunctionality of neoliberal reforms and their anti-national character are proved. The growth of inequality, the loss of sovereignty by states, the expansion of poverty, the development of the corporate sector (including socially irresponsible speculative capital) is a natural result of the functioning of the neoliberal project. This project is a methodology in the hands of transnational business for opening up the economies of sovereign states and enslaving societies. The growth of inequality in the world is associated with the policy of neoliberal reforms. The modern “postmodern economy” is characterized by virtualization, simulacrization, and financial speculation. In the article, the greatest attention is paid to the development of the speculative financial sector, which has become widespread due to the implementation of neoliberal policies. Financial speculation is considered as a socially harmful phenomenon, bearing its share of responsibility for the growth of inequality. Special attention in the article is paid to the recently expressed positions of analysts who have long stood on the ideological ground of defending neoliberalism. However, it is interesting that due to the disastrous results that this project brings to humanity, they have in some way changed their attitude towards it.

Harnessing the synergies of independent central banks and human capital for enhanced financial sector development in Africa

Using panel data from 2004 to 2012, we employ a two-step system GMM estimation technique, with robust standard errors, collapsed instruments and illus-trate marginal effects of central bank independence on financial development in Africa. We also examine the moderating roles of human capital, proxied by literacy rates on the CBI-financial development nexus. We find that, in countries with higher literacy rates/human capital, the positive impact of dejure CBI on financial development is enhanced. Higher literacy rates however, worsen the negative impact of de facto CBO on financial devel-opment. Independent central banks can be made more effective in achieving financial development through governments improving literacy rates. The study is the first to empirically examine the impact of central bank independence on financial development using both dejure and de facto CBI measures and literacy rates in explaining this relationship

Do environmental technology and banking sector development matter for green growth? Evidence from top-polluted economies.

Pursuing green growth is imperative to cope with the climate change battle. Green growth in top-polluting economies is being encouraged. The underlying work is aiming to investigate the impact of environmental technology and banking sector on green growth. More precisely, the study employs CS-ARDL and PMG-ARDL methods for empirical assessment. The FMOLS and DOLS techniques have been used to perform the sensitivity analysis for CS-ARDL and PMG-ARDL results. Empirical evidence of both the CS-ARDL and PMG-ARDL models reveals that banking sector development and environmental technology promote green growth. In detail, the insights reveal the significant and positive effect of environmental innovations and technology on green growth in both long-run as well as in short-run. Moreover, the findings of the study also disclose the significant and positive effect of banking sector and stock market developments on green growth in both long-run and short-run. Sensitivity analysis confirmed and improved our findings. Based on these effects, the study delivers policy implications for the promotion of environmental-based technological innovations and financial sector development to enhance green growth in top-polluted economies.

The Impact of Financial Sector Development on Inflation in CEMAC

As an extension of existing empirical research, the paper shows that despite the structure of a financial sector, the financial sector development moves in opposite directions with inflation. Empirical verification using fixed-effects method from 2000 to 2018 in CEMAC countries provides datum about the theoretical hypothesis that there is negative relationship between inflation and financial sector development. Besides, results show that despite the low level of inflation target in CEMAC, the negative relationship between inflation and financial sector development exit and the credit risk associated to credit supply activity increases inflation in an important proportion. This increase of inflation reduces the performance of the financial sector and delays the central banker actions. The main policy recommendation addressed to monetary and financial policy actors in CEMAC is to improve strategies to contain the spillover effects due to the development financial sector.

Institutional perspective of financial sector development: A multidimensional assessment

Financial sector development is a multidimensional process that plays a vital role in the economic growth and development of a country. This study investigates the effect of institutional quality on multidimensional financial sector development, and its dimensions, such as, depth, access, and efficiency. We used a panel dataset of 85 emerging and developing economies from 1996 to 2018 for analysis. Our findings based on 2SLS estimation demonstrate that institutional quality has a significant positive effect on the progress of the financial sector, especially its depth, access, and efficiency. The breakdown analysis shows that most of the key components (control of corruption, government effectiveness, regulatory quality, rule of law, and voice and accountability) of institutional quality enhance the financial sector development. Our empirical results are robust across alternative measures of institutional quality, split-sample analysis, alternative instrument, and estimator. This paper also offers useful policy implications to the stakeholders in emerging and developing economies. • The effect of institutional quality on financial development and its dimensions is investigated.· Results are drawn from 85 emerging and developing economies. • Institutional quality promotes financial development and its dimensions. • Most of the components of institutional quality are fostering financial development.

Role of financial sector development in foreign direct investment inflows in BRICS

This study examined the influence of financial sector development on FDI inflows in BRICS using panel data (1991–2020) analysis methods. The influence of the complementarity between the financial sector and human capital development on FDI inflows was also examined in the context of BRICS using the same data set and econometric methodologies. The advantage of this study is that the results are used as a basis by BRICS countries to develop financial sector development policies that attract significant FDI inflows. Financial sector development (model 2 and 3 of the pooled ordinary least squares approach) significantly enhanced FDI inflows. Human capital development (model 3 of the fully modified ordinary least squares) was found to have had a significant positive effect on FDI inflows in BRICS group of countries. The combination between financial and human capital development under (1) model 1 of the fully modified ordinary least squares and (2) models 2 and 3 of the pooled ordinary least squares (POLS) was observed to have significantly enhanced FDI inflows in BRICS. The study outlines the financial and human capital development recommendations that need to be implemented to facilitate more FDI inflows. Acknowledgment Kunofiwa Tsaurai is grateful for the moral support from his employer, University of South Africa.

Do terms of trade affect economic growth? Robust evidence from India

AbstractThis study extends the previous empirics and conducts a comprehensive analysis of the effects of terms of trade (TOT) on economic growth in the large and emerging market economy, India, which experienced tremendous transformation from a persistently low‐growth economy in the 1950s–1970s to a moderate‐growth economy in the 1980s and then to a high‐growth economy, following the onset of inclusive economic reforms from the beginning 1990s. The TOT remained unfavourable during the 1950s, witnessed boom during the mid‐1960s to the mid‐1970s, showed sharp downturn during the mid‐1970s to the mid‐1980s, and then displayed deteriorations again from the late 1990s to 2017–2018. The model estimated in one‐regime setting with no structural break and in a sample‐split setting with multiple structural breaks—over both “long” and “short” time periods—supports the presence of cointegration among variables and suggests the positive and significant long‐run effects of TOT on economic growth. The diversification of trade, the continual improvements in the quality of export products, and the development of high value‐added industries are essentially crucial to induce long‐term improvements in TOT. The improvements in TOT need to be accompanied by the development of financial sector, expansion of external trade, and acceleration of domestic investment.

Private Saving in Ghana: The Combined Efforts of Financial Development, Interest Rates, and Inflation

Understanding private saving behaviour of the citizenry is crucial for informed policy decisions in an economy. The reason is not far-fetched; economies gain sustained growth from investment through saving. However, it does appear much of the available literature is on aggregate private savings rather than on private saving behaviour. This study updates the literature by looking at the combined effects of financial development, interest rate and inflation on private saving behaviour among Ghanaians. Data for the study were obtained from the World Bank Development Indicators between 1980 and 2019. We employed Johansen Cointegration Test; attempts are made to ascertain the existence of a long-run relationship among variables using the Vector Autoregressive (VAR) Model. The study confirms a significant positive relationship between private saving behaviour and financial sector development. This partly explains the relevance of deepening the financial sector through reductions in costs of performing transactions and initiating contracts to encourage private saving through improved propensity to save by the old and to rake in new entrants. A reliance on macroeconomic variables to forecast the behaviour of private saving enjoins policy decision makers to consider the implications of their decisions for private saving. Among the recommendations are, lower borrowing costs across the economy, resulting in increased investment and consumption spending, and hence economic recovery only in times of stagnation.

Environmental Risk and Foreign Direct Investment: the role of Financial Sector Development

The study examines the role of financial sector development in the relationship between Foreign direct investment (FDI) and environmental risk using a more comprehensive measurement of financial sector development. The study set up a panel dataset to cover 45 Sub-Saharan African economies from 1982 to 2018 and applies the system GMM technique to accommodate the dynamic nature of the dataset and make provisions for endogeneity and heteroskedasticity in the series. The findings suggest that the unmitigated effect of FDI on environmental risk is detrimental. However, FDI conditioned on the local financial sector development minimizes environmental risk. Again, the findings suggest that countries with low financial sector development indicators report worse environmental risk than their counterparts.The financial sector development is a composite index comprising financial depth, access, and efficiency. Hence, as a matter of policy, we suggest that countries should make a conscious effort to further develop these components by investing in financial infrastructures like technology, regulations, and institutions.

Impact of Financial Development, Financial Liberalization and Economic Growth on Financial Instability: Evidence from Panel Data

Financial instability refers to the situation when financial system faces some disturbances and volatility. There are some important factors that can have a significant influence on the stability or instability of the financial sector. The main objective of this study is to examine the impact of financial sector development, financial liberalization, and GDP growth rate on financial instability. Using data from 53 countries from 2000 to 2016 and employing a battery of estimation techniques consisting of fixed effect, random effect, dynamic panel, and system GMM, the study finds that financial development and financial liberalization accentuate financial instability. The study also finds that economic growth dampens it. Furthermore, the relationship is robust to a variety of controls like monetary independence index, exchange rate stability, law and order, and government expenditure. The policy implication is straightforward that financial development and financial liberalization demand a caution.

Eradicating tax evasion in Indonesia through financial sector development

Eradicating tax evasion in Indonesia through financial sector development

Financial Sector Development and Capital Formation: A Comparative Analysis of Nigeria and South Africa

This study examined the effect of financial sector development on capital formation of Nigeria and South Africa using time series data from 1987-2019.Time series data was sourced from Central Bank of Nigeria Statistical bulletin and World Bank data base. percentage of capital formation to gross domestic products was used as the function of credit to private sector, broad money supply, interest rate spread and market capitalization ratio. Ordinary least square methods of cointegration, granger causality test, unit root test and Vector error correction model. The study found that the financial sector development explained 64.1 percent variation in Nigeria capital formation as against 46.4 percent variation from South Africa; this implies that the variables have more explanatory powers in Nigeria than South Africa. From Nigeria, the study conclude that credit to private sector have positive and significant effect, interest rate spread have negative and no significant effect while money supply and market capitalization ratio have positive and significant effect on Nigeria capital formation. However, from south Africa, credit to private sector have negative and no significant effect, interest rate spread have positive and significant effect, money supply have positive and no significant effect while market capitalization ratio have positive and significant effect on south African capital formation. It recommends that the need to increase the size of the markets in both countries by increasing the number of financial instruments available to investors so as to increase trading as well as improve liquidity in the markets and government effort to increase the operational efficiency of the financial sector; the banking habit shall be increase and banking density reduced through effective branch banking policies to enhance effective savings mobilization and credit allocation that will bridge the wide savings-investment gap in the economy

Unbundling the dynamic impact of renewable energy and financial development on real per capita growth in African countries.

Industrialization is considered imperative for growth but energy transitions are paramount for inclusive and green growth especially for a region with low financial sector development to spur investment in renewable energy. This study thus unbundles the interrelation among renewable energy production, financial development, and real per capita growth in 32 selected African countries from the period of 1996 to 2018. These countries are categorized on the basis of oil-rich and non-oil-rich as well as income levels. The study employs Pooled Mean Group, Augmented Mean Group, and Dynamic OLS, and key findings are established. The findings reveal a significantly positive renewable energy-economic growth relationship in all the different groups. Financial development is also found to improve economic performance in all categories except in non-oil-rich African countries. These findings empirically support the need for cleaner energy in the production process to spur inclusive and green growth amidst current global concern for climate change and global warning. This study thus recommends the restructuring of the energy pricing system, provision of long-term finance, adoption of risk mitigation instruments, and improved institutional framework for private participation in renewable energy infrastructural development for growth sustainability in Africa.