Low Levels Of Financial Development Research Articles

Financial development and central bank bilateral currency swaps: Is there trade effect?

Purpose ― This paper aims to empirically investigate the impact of currency swaps on international trade, given China's differential level of financial development and its currency swap partners. Methods ― The study employes an empirical structural gravity model using datasets encompassing financial development, trade, and intuitive gravity equation variables for 27 countries from 1980 to 2013. The level of financial development and swaps was captured by the interaction term of the disaggregated measure of financial development, such as access, depth, and efficiency, each interacting with currency swaps.Findings ― The findings suggest that currency swaps are essential for trade and exhibit a large trade effect, especially for countries with relatively low levels of financial development. The paper substantiates empirical evidence indicating disparities in financial development across countries, and such differences are important in determining trade patterns. Implication ― Strong financial systems promote trade in advanced economies, whereas the opposite holds true for developing countries. The examination of the influence of financial systems on trade through empirical tests remains important on the research agenda of policymakers and researchers, especially those looking at industry-level import and export data.Originality ― The study delves into the nexus between financial development and trade within the framework of the Central Bank bilateral currency swap network by highlighting the role of financial institutions and market size (depth), activity (access), and efficiency. In addition, it addresses the drawbacks of previous empirical research that largely focuses on the private credit-to-GDP ratio as a key proxy for financial development.

Environmental pollution, green finance, and enterprise growth based on the environmental Kuznets curve perspective

This study empirically examines the impact of environmental pollution on enterprise growth using data from the Chinese Enterprise Database and the Environmental Pollution Database. Results revealed (1) an inverted U-shaped impact of environmental pollution on enterprise growth. (2)After Furthermore, adding an interaction term between green finance and environmental pollution could significantly promote enterprise growth in the target and neighboring regions. (3) Market competition was found to moderate the inverted U-shaped relation between environmental pollution and enterprise growth. (4) Additionally, this relation was more pronounced in regions with lower levels of financial development.

Managing liquidity along the supply chain: Supplier‐base concentration and corporate cash policy

AbstractWe find that customer firms with more concentrated supplier bases tend to hold higher levels of cash reserves. The positive relation between supplier‐base concentration and cash holdings is more pronounced for firms with nonstate ownership, higher market competition, worse inventory efficiency, more relationship‐specific investment, central positions in the production networks, and headquarters located in regions with lower levels of financial development. Furthermore, we show that debt issuance enhances firms' cash holdings when they have concentrated suppliers, and supplier‐base concentration increases firms' cash spending on R&D investment. Our study highlights the importance of supplier structure in shaping corporate cash policy.

A threshold panel model for exploring the nonlinear connection between entrepreneurship and economic growth

The paper examines the relationship between entrepreneurship and economic growth, specifically focusing on the role of financial development as a factor that can influence this relationship. The authors employ the panel transition regression (PTR) model to analyze data from 96 countries spanning the years 2003 to 2020. The analysis reveals the presence of a threshold that determines the impact of entrepreneurship on economic growth. In the first regime, characterized by a lower level of financial development, the study finds no statistically significant influence of increased entrepreneurial activities on economic growth. This suggests that below a certain level of financial development, entrepreneurship alone may not contribute significantly to economic growth. However, in the second regime, which corresponds to a higher level of financial development, the study demonstrates a positive effect of increased entrepreneurial activity on economic growth. In this regime, an expansion of entrepreneurial endeavors leads to a beneficial impact on the overall economic growth of a country. These findings imply that there exists a minimum threshold of financial development required before it starts significantly contributing to economic growth. Once this threshold is surpassed, with the presence of adequate financial development, an increase in entrepreneurial activity can have a positive and substantial effect on a country's economic growth.

Can agricultural low-carbon development benefit from urbanization？-Empirical evidence from China's new-type urbanization pilot policy

Advancing agricultural low-carbon development (ALCD) holds substantial real-world significance for the low-carbon sustainable growth of the global economy. Traditional urbanization, focusing on the “one-way” concentration of elements in cities and pursuing urban expansion's scale and speed, poses a threat to ALCD. In contrast, new-type urbanization (NTU), which emphasizes a “two-way” concentration of elements in both rural and urban areas, provides an approach to address this issue. Nevertheless, no research has investigated the relationship between NTU, particularly the new-type urbanization pilot policy (NTUPP), and ALCD. To fill this void, this research employs panel data from 210 Chinese cities from 2006 to 2019, using a difference-in-differences (DID) model to investigate the impact and mechanisms of NTUPP on ALCD for the first time. The study reveals: (1) NTUPP significantly boosts the level of ALCD, with cities that have implemented NTUPP showing an average enhancement of 19.13% in ALCD levels compared to those without NTUPP. (2) NTUPP chiefly fosters ALCD by improving agricultural technological efficiency rather than advancing technological progress. (3) Relative to smaller cities, northern cities, eastern cities, resource-based cities, major grain-producing areas, cities with substantial government intervention, and cities with lower levels of financial development, NTUPP is more efficacious in enhancing ALCD in larger cities, southern cities, central and western cities, non-resource-based cities, non-major grain-producing areas, cities with minimal government intervention, and cities with advanced financial development. (4) NTUPP advances ALCD in local cities and boosts ALCD in neighboring cities via spatial spillover effects. This research aids the Chinese government in clarifying the implementation effects of the new-type urbanization pilot policy based on its findings, offering theoretical underpinnings and practical evidence for government departments in shaping and assessing the policy, and providing insights and evidence for other nations worldwide to advance sustainable agricultural development via enhanced urbanization efforts.

On the channels of “resource curse of the financial sector”

Aim. To identify the channels of the “resource curse of the financial sector”.Objectives. Systematization of the main approaches to describing the relationship between the state of the financial sector and resource dependence; classification of the identified channels of the “resource curse of the financial sector”.Methods. This article is based on the analysis and systematization of existing empirical and theoretical studies in the field of “resource curse of the financial sector” and related areas. The author used the methods of synthesis, generalization, classification and system analysis.Results. The description of possible channels of resource dependence influence on financial development has been carried out. The channels of “resource curse”, investment and savings, “Dutch disease”, volatility, human and social capital, “interest groups”, institutional channels are considered. The identified channels of the “resource curse of the financial sector” (or channels of the influence of resource dependence on the state of the financial sector) include a different set of chains of cause-effect relations. Some channels (the “resource curse” channel, channels related to the “Dutch disease”, etc.) involve explanations of the “resource curse” affecting the processes of economic growth and the resource curse hypothesis itself. Such channels are classified as specific. Depending on the nature of the impact of resource endowment on the state of the financial sector, three groups of channels are identified: “resource curse”, “conditional resource curse” and “resource blessing”.Conclusions. The hypothesis of “resource curse of the financial sector” can be considered as an element of a comprehensive approach to analyzing the peculiarities of the functioning of the economy under conditions of resource dependence. One of the formulations of this hypothesis assumes a relatively lower level of financial development, at which structural changes occur in the financial sector of countries specializing in the production and export of natural resources. The nature of the channels identified allows us to argue that only under a certain set of conditions the “resource curse of the financial sector” can occur, in which the fact of resource dependence of the economy or its consequences is a constraint for the development of the financial sector. The introduced channels need empirical verification. The developed classification of channels of “resource curse of the financial sector” can serve as a starting point for such an analysis.

Revisiting the linkage between green finance and China’s sustainable development: evidence from the pilot zones for green finance reform innovations

Based on the fundamental logic of “green finance – improvement of ecological environment and new kinetic energy of economic development – sustainable development of economy and society”, this paper conducts quasi-natural experiments using panel data from 30 provinces and cities in China between 2013 and 2021. It explores the effects of pilot policies of the green finance reform and innovation pilot zone on the sustainable development of the economy and society through a double difference model. The study reveals that the establishment of the green finance reform and innovation pilot zone has a significant promoting effect on the sustainable development of the economy and society. This conclusion remains valid even after conducting a series of robustness tests. In further analysis, it is found that the promotion effect of the green finance reform and innovation pilot zone on sustainable development exhibits some temporal characteristics. It is particularly significant in regions with lower levels of financial development and industrialization but higher levels of technological innovation. Mechanism analysis indicates that the pathways through which the green finance reform and innovation pilot zone facilitates economic and social sustainable development are relatively singular, primarily revolving around the improvement of the ecological environment. The key contribution of this paper lies in demonstrating the crucial role of pilot policies in the field of sustainable economic and social development. Additionally, it offers new insights for strengthening the implementation effectiveness of green finance pilot policies.

Macroeconomic effects of fiscal policy shocks: panel VAR evidence from MENA countries

ABSTRACT This study examines discretionary fiscal policy effects on output by employing a Panel VAR model in MENA countries during 1990–2018. the results demonstrate fiscal multipliers are larger when public debt is low, at a high institutional quality, and during recession periods. Contrary to empirical studies, we found the response of output to fiscal shocks is larger at a low level of financial development. Our findings have significant policy implications focusing on fiscal policy mix in downturns of an economy, lower levels of public debt, lower levels of financial development, and a higher level of institutional quality.

Do remittances react to commodity windfall? Evidence from Latin America and the Caribbean

Remittance has been growing steadily in the past decades, along with the pace of globalization. The current literature has focused extensively on the impact of remittances on growth, while the causal evidence in identifying the relationship between income shocks and remittances is limited. Using a panel of 30 countries in Latin American and Caribbean (LAC) region from 1990–2014, we examine the effects of exogenous income from international commodity price windfall on remittances. Our paper finds that an increase in commodity windfall leads to a significant rise in remittance inflows. We also reveal that financial development underpins the “commodity windfall-remittances” relation. Remittance is a low-cost financing option in countries with low levels of financial development; hence they receive more remittance flow in response to the commodity windfall. Our finding calls for more policy attention to promote migrants’ access to financial services.

Can Digital Finance Improve Corporate Environmental Performance? Evidence from Heavy Polluting Listed Companies in China

ABSTRACT In the context of the digital transformation of China’s financial system and the synergistic growth of its economic environment, this research explores the impact of digital finance development on the environmental performance of enterprises. Through empirical analysis of data gathered from A-share heavy polluters from 2011 to 2020, our findings show that digital finance effectively improves the environmental performance of heavy polluters. The conclusions remain robust after controlling for endogeneity issues and running a series of robustness tests. The mechanism test reveals that the effects of financing and innovation are important channels through which digital finance influences industrial environmental performance. Furthermore, heterogeneity analysis shows that the beneficial influence of digital finance on the environmental performance of firms is enhanced when firms are smaller, have non-state ownership, are located in East China, and have a lower level of financial development. These findings expand upon the factors that influence corporate environmental performance and provide empirical evidence that heavy-polluting companies should fully grasp the opportunities of digital finance development and improve their environmental performance in order to achieve higher-quality development.

Rare Disasters, Financial Development, and Sovereign Debt

ABSTRACTWe propose a model of sovereign debt in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the “debt intolerance” phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.

Financial risk assessment of six regions in China under the TOPSIS model based on a coupling perspective

As China's economy enters a new normal, the economy gradually changes from high speed to high quality, and the task of resolving various types of risks in each region becomes more arduous, while the prevention and control of regional financial risks will certainly become one of the severe challenges faced under the new economic normal. Based on the parallel data of six regions in China, this paper combines EWM subjective weights and AHP objective weights to construct EWM-AHP coupling weights. It also adopts the distance between ideal point superiority and inferiority solution (TOPSIS) ranking method to quantify the relative relationship between the sample and the evaluation criteria and establishes a differentiated financial risk indicator model for the six regions. The results show that the financial risk is lower in regions with a weaker economic base and lower level of financial development. Financial risk is higher in regions with a higher degree of financial openness. The integrated EWM-AHP and TOPSIS models can effectively reduce the financial risks in the development process of the six regions and improve the smoothness of economic operation, which has a particular application value. The results show that the financial risk is higher in regions with more backward economic development, and the financial risk index is lower in regions with sound capital market development.

Cross-border trade credit and trade flows during the global financial crisis

Cross-border trade credit is credit extended by both exporters and importers and constitutes a considerable share of the trade finance instruments used in global trade. We use quarterly data on cross-border trade credit recorded in the International Investment Position at the International Monetary Fund and examine its effects on trade flows during the 2008–09 global financial crisis. Unlike previous studies, we find that the effects on real imports are positive on average, and that these effects are more pronounced during the crisis. Specifically, we find that a decrease in trade credit explains approximately 6% of the trade collapse during the crisis. Finally, the results show that the effects of trade credit on exports are more pronounced during the crisis in countries with a low level of financial development in the pre-crisis period.

Supply Chain Finance and the Sustainable Growth of Chinese Firms: The Moderating Effect of Digital Finance

Sustainable development is crucial to the survival and healthy development of enterprises, which is closely related to their financing situation. Supply chain finance is an effective way to improve and enhance the financing situation by easing financing constraints and reducing financing costs. As an important source of supply chain short-term financing, trade credit plays an important role in enterprise production and circulation. Taking Chinese listed companies from 2011 to 2020 as samples, this paper studied the impact of trade credit on sustainable growth and its internal mechanism. Furthermore, we analyzed the moderating effect of digital finance development on the influence of trade credit on sustainable growth. It is found that receiving trade credit benefited firms’ sustainable growth. Furthermore, study found that receiving trade credit has a greater positive impact on the sustainable growth of enterprises in regions with higher levels of financial development, high-tech industries, state-owned enterprises and small enterprises. Whereas, the provision of trade credit had an obvious inhibiting effect on the sustainable growth of enterprises in the regions with low level of financial development, non-high-tech industries, private enterprises and small enterprises. The results of the influencing mechanism showed that receiving trade credit promoted firm’s sustainable growth by “agency cost reducing effect,” while providing trade credit inhibited firm’s sustainable growth by “forcing effect.” In addition, the development of digital finance weakens the positive impact of trade credit financing on enterprises’ sustainable growth but strengthens the negative impact of providing trade credit on sustainable growth. From the perspective of sustainable growth, this paper explained the role of trade credit financing in alleviating the financing dilemma of enterprises, which is urgently needed by most emerging economies pursuing high-quality development. Therefore, in order to give full play to the role of trade credit financing, the government should actively create a good credit environment. At the same time, the government should vigorously develop digital finance to enhance its ability to serve the real economy.

How does China's green credit policy affect the green innovation of heavily polluting enterprises? The perspective of substantive and strategic innovations.

Green credit policy is an important practice to guide green development through the rational allocation of credit funds. Using the promulgation of the "Green Credit Guidelines" policy in China as a quasi-natural experiment, this paper examines the impact of green credit policy on heavily polluting enterprises' substantive and strategic green innovations within a difference-in-differences framework. We find that green credit policy improves the overall and strategic green innovations but has no significant effect on substantive green innovation of heavily polluting enterprises. Moreover, this effect is more prominent for state-owned enterprises and enterprises in regions with lower levels of financial development. Further analysis demonstrates that the green innovation induced by green credit policy increases heavily polluting enterprises' loan availability but does not improve heavily polluting enterprises' value. This paper sheds new light on the relationship between green credit policy and corporate green innovation in China as a transition economy.

Nexus between financial development and energy poverty in Latin America

This paper estimates the association of financial development with energy poverty in Latin America through the entropy method, the Principal Component Analysis (PCA), and an econometric analysis. Energy poverty scores of Latin American countries are less than unitary, making up for 17.54 percent, which implies that 17.45 percent of the residents did not attain the efficiency frontier of adequate energy consumption. Within all quantiles, the results elucidate that increases in energy poverty are attributed to low levels of financial development. The study provides policy recommendations for energy poverty alleviation through financial development.

Financial Integration and Economic Performance: Comparative Evidence from SADC and ECOWAS Regions

This paper examined the impact of financial integration on economic growth in Southern African Development Community (SADC) and Economic Community of West African States (ECOWAS) countries over the period 1993–2013. Using the Panel ARDL PMG Model developed by Pesaran and Shin, other control variables (trade openness, inflation, government expenditure, and institutional quality) were captured in the model. It was found that there is a significant and positive impact of financial integration on economic growth in the ECOWAS region in the long run. Whereas, even after controlling for necessary variables, financial integration exacerbates negative and insignificant effects in determining economic growth in the SADC region, both in the short run and long run. The insignificant and negative impact of financial integration on the region’s economic growth was attributed to several possible factors, including the low level of financial development in the SADC region, which is unconnected with the poor level of governance, unstable and fragile financial stability, or low creditworthiness, that are prevalent in developing countries like those in SADC countries. The findings suggest, amongst others, that increasing financial integration could improve the productive capacity of the economy, including more investments and the efficient allocation of capital, thus enhancing economic growth in these regions. This paper sheds new insights on a better evaluation of the past and present theorizing on the subjects of financial integration and economic growth, especially in comparing the separate effects on the economies of the SADC and ECOWAS countries.

Does Digital Financial Inclusion Reduce China’s Rural Household Vulnerability to Poverty: An Empirical Analysis From the Perspective of Household Entrepreneurship

This paper evaluates the impact of digital financial inclusion (DFI) powered by digital technologies on rural household vulnerability to poverty based on data from the China Family Panel Studies (CFPS) and DFI data from the Institute of Digital Finance Peking University. The results show that both DFI and its secondary indicators reduce rural household vulnerability to poverty. Household entrepreneurship is an intermediary factor of DFI influencing vulnerability to poverty; that is, DFI stimulates rural households’ entrepreneurial behavior, thereby reducing their vulnerability to poverty. Through the analysis of income heterogeneity, financial development level, and human capital in the region, it is found that DFI is more helpful in reducing the vulnerability to poverty for rural households with low income, a low level of financial development and low human capital. Therefore, the Chinese government should map out the DFI development path, build a DFI control system with internet technologies, and actively play the mutually supporting role of DFI and other influencing factors to boost DFI development, minimize the risk of returning to poverty and thereby reduce rural household vulnerability in China.

Financial reform and innovation: Evidence from China’s Financial Reform Pilot Zones

ABSTRACT Innovation is a channel through which financial reform promotes economic growth. Drawing on the quasi-experiment of China’s Financial Reform Pilot Zones, panel data from 293 prefecture-level cities in China from 2003 to 2019, and a difference-in-differences method, this paper evaluates the effect of financial reform on innovation. We find that financial reform significantly motivated innovation by promoting financial development, such as equity market development and credit market development. Moreover, the effect of financial reform on innovation shows diminishing marginal utility: in cities that started with a lower level of financial development, the policy effect on innovation is stronger.

Does Financial Development Contribute to Fertility Decline in Developed and Developing Countries?

The “old-age security” hypotheses propose that financial market can affect individuals’ decision to have less or more children. In previous literature, children are considered an asset and investment at low level of financial development that could bring returns and security during old age. Nevertheless, at higher level of financial development, individuals have more access to fund and opportunity for investment during old age and as a result the demand for children is less. Furthermore, increase in female labour participation rate in the economic sectors will also discourage them to have more children. The development of commercial bank and non-banking financial institutions (NBFIs) has broadened credit accessibility and investment opportunity to household over the last decades. Well-developed financial system facilitates firms to access to the credit market and enhanced production efficiency and promote increases in wages in the modern market. Household have choice to move from traditional market (low wages, high fertility rate) to work in modern sector (high wages, low fertility rate). The purpose of the study is to investigate the impact of financial development on fertility for selected developed and developing countries. We employ generalized method of moment (GMM) model using annual data from 2005 to 2011. Our results found that financial development and fertility has inverse relationship for both developed and developing countries.