Examining the relationship between finance, institutions and economic growth: evidence from the ASEAN economies
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Examining the relationship between finance, institutions and economic growth: evidence from the ASEAN economies Hazwan Haini1 Received: 29 March 2019 / Accepted: 2 December 2019 © The Author(s) 2019
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. Keywords Economic growth · Financial development · Institutions · ASEAN JEL Classification E44 · G20 · O40 · O53
1 Introduction 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. In recent * Hazwan Haini [email protected] 1
School of Business and Economics, Loughborough University, Leicestershire LE11 3TU, UK
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Economic Change and Restructuring
years, policymakers in the ASEAN economies are committed to promote further regional integration and growth through the ASEAN Economic Community Blueprint that aims to promote ASEAN as a competitive single market economic region by 2025 (ASEAN Secretariat 2008). An important part of the initiative involves financial development and integration efforts in the region in order to promote further economic growth. In general, there is a consensus that financial development promotes economic growth, through the seminal work by King and Levine (1993) alongside many consequent empirical studies. Financial systems reduce information and transaction costs which allow intermediaries and markets to mobilise savings, allocate resources and facilitate risk management leading to capital accumulation and technological progress for economic growth (Levine 1997). However, 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
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