Financial Deepening in South Asian Countries: Major Determinants
Author
|
Dr. Ashwani
Assistant Professor
Department of Humanities and Social Sciences
National Institute of Technology, Kurukshetra, Haryana, India
E-mail:- ashwani@nitkkr.ac.in
|
Dr. Ved Pal Sheera
Professor
Haryana School of Business
Guru Jambheshwar University of Science & Technology, Hisar (Haryana)
E-mail:- vedpalhsb@gmail.com
|
Abstract
Purpose- South Asian countries are in nascent stage of their financial
deepening and launching the gradual steps for financial dimensions to gear up the
overall financial system. The present study accounts for the financial innovation
carried out in south Asian countries in past two decades and measures the financial
deepening for different periods. The study also identifies the structural shift
in financial systems of these economies and underlines the thrust areas for advancement
of financial deepening.
Design/methodology/approach- The study exploited
principal component analysis (PCA) for a dataset of South Asian Countries viz. Bangladesh,
India, Sri Lanka & Pakistan, over the period 1988-2012.
Findings- It is found that India financial system has shown consistent
growth over the period of time, but got affected in the global financial crisis,
whereas Bangladesh financial system has been able to maintain robust growth after
2007. Pakistan saw a better development in beginning of twenty first century but
got burst in the recent global financial crises. Sri Lanka has witnessed various
ups and downs in its financial performance for the sample period. The financial
markets based environment seems to have vibrant role in the overall financial development
of India and Sri Lanka.
Practical implications- From the perspective of various dimensions
of financial system, these economies are still in evolving stage in relation to
developed countries. The status of financial system has potential to focus on the
size, activity, efficiency and resource allocation pattern to further strengthen
their systems.
Originality/value - The paper quantifies the financial deepening
of the system in various dimensions over the period. This information may be quiet
useful for the decision makers to understand the dynamics of financial development
of sample economies and thereby devise the policies for next advancement.
Research Limitation: Present study has scope to
extend the analysis for recent developments in financial markets viz. derivative
markets and bond market.
JEL Classification: N35, N45, G10, G20
Key Words- Financial sector, financial deepening, Principal Component
Analysis, Financial Policy
1. Introduction
The identification of key economic growth drivers has been a matter of concern for
academicians and policymakers since last few decades. Existing literature has laid
down various measures for growth trajectory such as investment, trade openness,
labour productivity, etc. Meanwhile, it was contended that the deepened financial
system is an important peripheral factor along-with primitive inputs for the economic
growth. Schumpeter (1912) was among the few who highlighted the explicit role of
financial sector in economic development. He described that financial intermediary
especially bank facilitates in funding the most successful projects. Bagehot (1873)
argued that a major difference between England and other poorer countries was the
mobility of resources by the financial system through its network. It is also held
that it is not only the saving rate of a nation that induces economic growth, but
the ability to pool society’s resources and allocating those savings toward the
most productive ends. The role of financial development in economics growth has
been attributed through capital accumulation (Greenwood and Jovanovich; 1990), acquiring
information about the feasibility of investment projects (King and Levine, 1993),
improvement in corporate governance (Bencivenga and Smith, 1993), Fundamentally
the role of financial sector is to process the information and reduce risks and
uncertainty associated with investment, and so guides the funds to invest in most
productive assets and consequently enhances the economic growth. Moreover, enhanced
financial development promotes financial stability and safeguards the economy from
adverse shocks (IMF, May 2015).
The above studies primarily focused on the capital accumulation, screening firms,
monitoring firms and corporate governance dimension of financial system. Besides,
some of other studies focused on the liquidity risk that impediment the investment
in productive assets as investors do not want to relinquish the control of their
savings for long period. They prefer to make investment in most liquid assets which
are relatively less productive. In this perspective, financial sector development
provides an offset for investment between the illiquid and productive assets and
so affects growth (Diamond & Dybvig, 1983). Greenwood and Smith (1996) highlighted
the concept of exchange, specialization and innovation. They argued that financial
arrangements facilitate transactions by lowering the transaction cost and provides
greater specialization, thus affects the economic growth. Devereux and Smith (1994)
demonstrated that stock market provide a vehicle for diversifying risk and thus
influence growth by shifting investment into higher return projects. In brief, financial
system plays a vibrant role in an economy via mobilizing saving, acquiring the information,
monitoring managers & exerting corporate control, reducing risk and facilitating
exchange (Levine, 1997). In a sectoral level study in 41 economies, role of finance
in economic growth is identified to a certain level (Aizenman, Jinjarak, and Park.
2015).
The above cited studies along with many others suggest that we cannot ignore the
role of financial sector while hashing out the policies related to the economic
growth. In light of the observations and reasons given in the existing literature,
the strengthening and deepened financial sector has become key concern for development
of a country. Financial deepening has multi-fold dimensions viz. depth (size, and
liquidity of market), ability of individual to access financial services and the
efficiency of the institutions to provide financial services at low cost and with
sustainable revenue, and the level of activity of the capital market (Anuli and
Dennis, 2017). With multiple dimensions of financial development, mature economies
have grounded the policy actions to diverse areas viz. banking, financial markets,
pension funds and bond markets and have succeeded in bringing the financial development.
However South Asian countries are in nascent stage of their financial deepening
and launching the gradual steps for financial dimensions to gear up the overall
financial system. The present study accounts for the financial innovation carried
out in south Asian countries in past two decades and measures the financial deepening
for different periods. Most of studies have tried to capture the finance-growth
nexus however little attempt has been made to capture the inter-temporal shifts
in financial system emanated through financial innovation.
South Asia has caught worldwide attention due to sustained growth rate of more than
5 percent for last decade, and emerged as a new growth pole in the world economy.
It considers the sample of South Asian economies viz. Bangladesh, India, Pakistan
and Sri Lanka. Hoskission et al. (2000) classified these countries as emerging economies
of Asia. The study also identifies the structural shift in financial systems of
these economies and underlines the thrust areas for advancement of financial deepening.
It will serve the purpose of policy makers to understand the dynamics of financial
system for next betterment of financial development. The study is organised as:
firstly highlights the economic performance of select economies during past four
decades; secondly discusses the methodology of the study; thirdly identifies the
prominent factors for financial development and discusses the inter-temporal financial
development. Finally the whole discussion of the study is concluded.
2. Economic Performance of South Asian Countries
The present section highlights the inter-temporal economic performance of South
Asian economies embodied in the major economic fundamental indicators. The performance
of past five decades ranging from 1960-2012 has been described. The sample period
is classified into various sub periods to get better insight about the economic
behavior of region economies. The performance of various economic indicators for
these economies in descriptive form is exhibited in Table 1.1 and 1.2.
Bangladesh economy grew at the rate of around 5 percent during 1960-65. The economy
recorded negative growth rate during 1971-75, might be the result of closed state
intervention mechanism. Prompted by this lower growth, the economy undertook economic
reforms in 1976 that facilitated it to achieve the stable growth rate of about 3-4
percent till mid-1990s. The economy has enabled consistent growth in fixed capital
formation and savings however, their shares remain small in relation to GDP. In
recent years it has maintained the average growth rate of more than 6 percent, and
even per-capita GDP growth is also more than 5 percent which indicates the improvement
in the living condition of the people. The country moved from the deficit current
account to surplus account. On foreign investment front, the quantum is smaller
but it has increased substantially in the recent years (Table 1.1).
India is the largest economy of the region, and in recent past emerged as one of
the leading economy of the world after China. Indian economy expanded narrowly with
GDP growth rate of 3 to 4 percent during 1960-80. It has experienced improved growth
after adopting market friendly economic reforms in 1991. These reforms were introduced
in order to overcome the balance of payment crisis in 1990. [i] The major reforms
were targeted to make the system market friendly, and included fiscal reforms, domestic
liberalization and opening-up the economy. After the structural adjustment programme
of 1991, the economy accelerated from GDP growth rate of less than 5 percent to
more than 6 percent and recorded higher than 8 percent growth in 2005-08. For the
same time the per-capita growth rate has also been robust indicating a sign of well-being
of the Indian people. The increasing trend of capital formation accelerated the
growth trajectory (almost 9 percent) of the economy in recent years. In mid of 1990s,
the economy also embarked on financial sector reforms in the form of deregulation
of interest rates, freeing of pricing restriction on the new issue of stocks in
the market, creating a healthy competition in banking sector by allowing private
and foreign banks, etc. As part of reforms, restriction on banks regarding credit
allocation and state interventions were abolished and capital account opened up.
On investment front, India emerged as an important destination for the foreign investors.
The FDI (percentage of GDP) has increased substantially from 0.14 percent in early
1990s to 2.14 percent during 2005-08 (Table 1.1). On external front India has continuously
faced the challenge of deficit current account. The gap has narrowed prior to the
global crisis but has again widened in 2009-12. In the recent environment, with
large deficit coupled with the withdrawal of foreign capital amid lower confidence
building, India is suffering from the huge depreciation of its currency, and Government
of India is struggling hard to manage the same.
Pakistan had attained the growth rate of more than 7 percent during 1960-65, and
has managed a sound growth for longer period till 1990 (Table 1.2). After this,
the growth rate of the economy faced sluggishness and declined to 3.4 percent during
1996-2000. Pakistan undertook ambitious financial sector reforms in early 1990s,
aimed to reduce the government intervention in the system, and in the process wide
range of reforms launched in 2000. The fiscal adjustment, banking sector reforms
and trade reforms were the part of major reforms. The economy has grown with 5.3
percent prior to the global financial crisis but reported lower growth after that
crisis, meaning by that economy is well exposed with rest of the world. In terms
of improvement in living condition of the people as proxied by per-capita growth,
the economy could not perform very well. Even Pakistan has a challenge of lower
level of its productive capacity as measured by gross fixed capital formation as
percentage of GDP. Pakistan economy is getting significant amount of foreign investment
that offsets the widened current account deficit and settles the overall balance
of payment of the economy.
Sri-Lanka economy has been experiencing ups and down since 1960s. These variations
in the economy might be associated with fluctuation in capital formation as well
as performance of financial system. The economy has undergone with major economic
reforms in 1977 that provided marginal gain to the growth of economy. Sri-Lanka
was first to commence the financial sector reforms in the region in early 1980s.
These reforms supported the economy to increase its growth. The economy is able
to maintain the growth rate of more than 5 percent since last decade. Sri Lanka
has been passing through a large current account deficit however attracted substantial
foreign investment (Table 1.2).
South Asian economies showed upward trends in the per-capita GDP growth over the
period of time except Pakistan. In early years of 1970, all the select economies
reported decline in growth rate. India emerged as the highest growth achiever among
South Asian economies (Figure 1). Economic reforms of 1991 provided a new path to
the Indian economy and since then, it is growing with upward trend. Indian and Bangladesh
economy were able to maintain its growth momentum amidst the Asian financial crisis
whereas Sri-Lanka and Pakistan affected marginally.
Figure 1 Per-capita GDP Growth Rates (%) of South Asian Economies
Source: Authors’ Compilation from WDI 2013.
3. Methodology
The methodology of the study is given as under:
3.1. Data and Resources
The present study has tried to gauge the financial development of the south Asian
economies by considering the various dimensions of finance in light of given literature.
These dimensions of financial development are size of financial system, role of
intermediaries and financial markets, allocation pattern of resources, etc. The
size of financial intermediaries is quantified through liquid liabilities as percentage
of GDP (M3). The functioning of financial system is proxied through the deposit
banks domestic credit as percentage of total assets (BANK) The allocation pattern
has been measured through the ratio of credit allocated to private enterprises to
total domestic credit (PRIVATE); credit provided to private enterprises as percentage
of GDP (PRIVY) and bank credit to private sector (BCRDT). The selection of these
parameters is grounded on existing literature (King & Levine, 1993; Levine,
1997; Beck et al. , 1999).
The above stated indicators are suitable to understand the financial intermediaries’
dimensions. However, financial markets ‘performance is equally important as it plays
vital role in risk diversification, amelioration of liquidity risk without affecting
the financing needs of promising projects. The role of financial market is measured
through the size, activity and efficiency. The market size is quantified through
market capitalization as share of GDP (MC) (Levine & Zervos, 1998), activities
are reflected through value of domestic equities traded on domestic exchange to
the GDP income (STVR) is utilized (Kunt & Levine, 1999) and to gauge the market
efficiency value of trades of domestic equities on domestic exchanges as a share
of the value of domestic equity or market capitalization (TR) is considered.
3.2. Data Sources
The study is based on secondary data extracted from international sources such as
World Development Indicators, International Monetary Fund publications, Asian Development
Bank publications (e.g. Key Indicators for Asia and Pacific 2013). The consistent
data for different dimensions of financial development are available from 1988 onwards
for these south Asian economies.
3.3 Method of Analysis
The study utilized principal component analysis method to present the multiple dimensions
of financial development into single dimension. The PCA utilizes the variations
among the variables to construct the composite score without losing much information.
The brief procedure of principal component is given as under:
First requirement is that variables which meant for analysis should be standardized.
They are standardized as:
Zit = (Yit –E(Yi))/SDYi (1)
Where Yit = base series, E(Yi) = mean of Y it,
SDYi = standard deviation of Yi
The principal component would be the linear combinations of individual financial
development indicators. The details of the research method are given in the Fritz
(1984).
After the identification of appropriate components which explain about 80 percent
of data variance, the computed score of PCA for financial development is transformed
for its mean value of 100 using the method developed by George (1980) Fritz (1984)
considered this methodology as superior for quantifying the financial deepening.
The index is computed after considering the due weightage of each financial indicator.
4. Financial Deepening in South Asian Economies
Based on above mentioned technique, results of financial deepening for individual
country are presented as follows:
4.1. Bangladesh
Bangladesh economy had broadly relied on institutional environment in early 1990s
as the size and activity of financial markets were very small. The market capitalization
as percentage of GDP (MC) and stock traded value ratio (STVR) had been less than
2 percent for each during 1988-92 and even could not secure the double digit value
of these variables till 2007 (Table 2). The average figures of these variables had
been around 7 percent and 5 percent respectively during 1998-2012. For the same
period, the size of institutional environment had been almost half of the Gross
Domestic Product (GDP). The commercial banks had also involved actively in the credit
creation process as reflected in their assets’ proportionate of total banking assets,
which ranging between 80 to 90 percent for the sample period. The results also suggest
that the role of commercial banks has increased over the period of time, however
the size of the institutional environment is not large enough and needs further
expansion. The resource allocation has improved as domestic credit to private sector
(percentage of GDP) and credit provided by banking sector has continuously increased.
The impact of financial crisis of 1997-98 can be observed in the decline in the
value of private credit as percentage of total credit. It has made little bit ambiguity
in the resource allocation pattern as credit to private sector (percent of GDP)
increased but credit to private sector (percent of total credit) has fallen (Table
2). This observation indicates the struggling of private sector in sharing banking
sector resources. All the select financial indicators have shown a surge in the
recent years amidst the global financial disturbance.
An attempt is also made for variable wise presentation of financial indicators for
all the select economies (Table 3). In terms of performance of financial markets,
it is found that India holds better development in size, activity and efficiency
compared to the level of Bangladesh, Pakistan and Sri Lanka. Similarly, India attained
higher level in financial institutional environment. But Bangladesh has outperformed
in terms of the growth of financial indicators particularly in resource allocation
over the period of time. Sri Lanka is giving a well competition to India in terms
of private credit allocation out of the total credit.
To get the aggregate view of various dimensions of the financial development, the
PCA is utilized to convert them into single composite index. The results in Table
4 indicate that three factors derived from eight variables explain almost 90 percent
behaviour of the financial development of Bangladesh. So they may be used as representative
of financial development. These factors are further summarized into single construct
using the above discussed method. In the combined score, variables BANK, PRIVATE
and market capitalization (MC) hold more weights in the financial deepening. The
composite index had attained the value of 83.2 in 1988 and with continuous surge
it reached to the value of 101.6 in 1995 (Table 5). [ii] The economy experienced a dip in
the financial performance during the Asian financial crisis. After 2003, the system
has shown a continuous surge and reached to highest level of 124.8 in 2010 and maintained
its momentum in the financial shocks period of the world economies. It reflects
the positive sign of development in financial system of the economy. The average
value of the index accelerated to higher side after the Asian financial crisis.
It may be inferenced that the economy has learned meaningful lessons from the crisis
and accordingly put the things in place for financial development.
4.2. India
Indian financial system had been characterized by institutional environment in early
1990s. For this period, market-based system was on lower side in terms of size and
liquidity, while the banking system was comparatively well developed. After the
launching of key economic reforms in 1991, financial markets could show their significant
position in the financial system. The same is confirmed with the increased value
of activity and efficiency indicators in the beginning of 21st century
(Table 2). The performance in terms of its turnover ratio and stock traded value
ratio reached at highest level of 307 and 107 respectively in 2000. The size of
financial market attained its highest value in 2007 as the MC ratio rose to 146.
On institutional environment front, India reported consistent growth in terms of
participation of commercial banks, size of financial institutions and activity of
institutions. The value for liquid liabilities as percentage of GDP increased from
44 in 1988-92 to 80 in 2008-12. The figures in Table 2 also suggest an improvement
in resource allocation as credit provided to private sector has been doubled from
1988-92 to 2008-12.
Based on eigen value criteria of factor analysis technique, two factors are selected
and utilized to compute the financial deepening index. These factors jointly explain
90 percent of total variance. Different variables have different weights based on
their importance. TR and STVR variables from the financial market front, and commercial
bank participation (BANK) from institutional side, hold the highest weights (Table
4). It indicates that the financial markets’ liquidity and efficiency, and commercial
banks’ participation play a crucial role for deepened financial system in India.
The computed index highlights that the financial deepening had been low in early
90s, but had shown upward movement till 2000. The economy was able to maintain the
same level of financial development amid the Asian financial crisis. This growth
performance was mainly contributed by surprising performance of market-based system
specifically for improvement in the liquidity and efficiency of the market. Indian
financial system was affected by the slowdown of 2001 as the index value declined
to 105 in 2001 from its level of 119 in 2000. After that India enjoyed a period
of high economic growth (around 8 percent) along with the consistent surge in financial
development. But with the existence of global financial crisis, particularly after
the sovereign debt crisis Indian financial system reported downward trend. Despite
the strong financial disturbances in the world economy in the recent past, Indian
financial system could mark for higher than the average value of index (100) with
greater stability. It indicates the robustness of Indian financial system.
4.3. Pakistan
The Pakistan financial system was weighted more by institutions in early 1990s as
evidenced from relatively lower size of financial market which was observed about
10 percent of GDP, and the activity indicator found as 1 percent during 1988-92
(Table 2). Since 2003, the Pakistan economy had witnessed a sharp surge in the role
of financial market. The turnover ratio had increased from less than 10 percent
in early 1990s to remarkably 329 percent during 2003-07. The figures of market efficiency
indicator observed for higher side, but with relatively smaller size of the market.
The Pakistan financial system had been relatively occupied by financial institutions
throughout the sample period. Various indicators of institutional based system had
shown improvement over the period except marginal decline in the Asian financial
crisis period. On resource allocation front, the financial system is lacking as
domestic credit to private sector is about one fourth of GDP. The ratio of private
credit to total credit had been hovering around 50 percent. It indicates that there
is much allocation of resources to the public sector. Extending credit to public
sector instead of private sector gives fewer incentives to the financial intermediaries
to acquire information and monitor managers. It raises the question of effective
functioning of financial system. More interestingly, most of the financial indicators
showed substantial decline in their values for the period 2008-12 compared to the
level of 2003-07. It states the more exposure of Pakistan financial system with
rest of the world economies.
In the composite score of financial development, around 90 percent of communality
variance is contributed by two factors where MC, liquid liabilities and PRIVY are
having weights of more than 3 for each one (Table 4). It reflects that size of financial
system and funnelling of credit to private sector are enhancing the overall financial
development. The variables having lowest weights are TR (-1.5) and banking sector
credit (0.9). The overall financial deepening index stood more than 90 in 1988,
but suffered decline for next two years (Table 5). In the following years some positive
sign noticed with the index value and moved to level of 104.6 in 1997. But the Asian
financial crisis affected the financial performance as the index value declined
continuously thereafter and reached to 82.7 in 2001. After 2001 the things became
more favorable for the financial system as the index value moved to its level of
127 in 2007. Again, the index values declined substantially and reached to less
than 90 in 2012. It can be well stated that Pakistan’s financial system is found
for more prone to the financial shocks. From the weights of different financial
indicators in financial deepening index, it may be inferenced that institutional
environment has played relatively more role in the overall development in financial
system of the country. The resource allocation indicators suggest that there is
enough space for their improvement to accelerate the financial system.
4.4. Sri Lanka
In light of given parameters of financial development, it is stated that Sri Lanka’s
financial system had been small in terms of size for the sample period. Financial
market was smaller in size with around 15-16 percent of the GDP. The liquidity of
the market was also very low as it was less than 1 percent of the GDP during late
1980s (Table 2). With the smaller size and activity of financial market, efficiency
also remained a serious concern. In mid-1990s some positive sign of development
in financial market was observed but the financial crisis affected the market adversely.
After the crisis, marginal growth was noticed in the economies’ financial market
but the size, efficiency and liquidity are still at lower side. The values of financial
market indicators had not changed much throughout the sample period as the size
of market is still one fourth of the GDP and activity is less than 5 percent of
GDP. Compared to financial market, institutional environment appeared to be the
key contributor to satisfy the financing needs of business houses. During 1990s,
about 15 percent of GDP was allocated to private sector. Out of the total credit,
private sector received a significant part (around two fifths) for the same period.
Over the period of time, credit allocated to the private sector enjoyed some improvement
but it is questionable as around only one third of the GDP goes into the hands of
private sector in the form of financial assistance. The role of deposit money banks
are significant in the financial system of the economy however, financial institutions
other than banks are still dominating. Since 1990s, most of the institutional environment
showed consistent growth except the global financial crisis period. But the major
concern lies in the form of lower size, activity and efficiency of Lankan financial
system. In light of given indicators, it may be stated that financial system has
wider scope to expand in various dimension including resource allocation.
To measure the financial deepening, three factors are identified based on eigen
value criteria explaining 89 percent variance of the communality. Among these factors,
financial market-based variables are getting relatively more weights than the institutional-based
variables. The respective weights for TR, STVR and M3 are 10.0, 6.4 and 6.2. Two
variables occupy the negative weights i.e. bank credit (-7.3) and privy (-2.9),
due to imbalance with the other indicators. Based on combined weights, it can be
hailed that financial markets’ indicators strengthen the overall financial system.
The practical exposure of Lanka in terms of size and activity of financial markets
is very limited. It offers a superb opportunity for Lankan economy to widen the
financial market along with activity to enhance the overall financial development.
On the ground of financial intermediaries, economy should strike a balance with
the other indicators of financial development. At aggregate level, Sri Lanka’s financial
deepening had been far less than its average level in late 1980s as the index was
lower than 75 (Table 5). In early years of 1990s, the economy realized positive
developments in its financial system, but the system moved with ups and down. In
the Asian financial crisis years, the system could manage its rhythm, but showed
a sharp dip in 2000. Again financial system became more deepen during early years
of 21st century but its performance got affected in 2006. Passing with
a dip in the global financial crisis period, system recovered in 2010 but again
halted in 2012. Overall, Sri Lanka handled smartly its financial performance in
Asian economic shocks of 1997 and 2001, but could not manage well during the global
financial crisis period. The index value is relatively more weighted by market-based
system and hence active policies related to the development of financial markets
may enhance the overall financial development of the economy.
5. Conclusion
It is found that financial institutions occupied the major role in financial system
in the earlier 1990s for South Asian economies. The experiences of developed countries
presented the facts that, when an economy moves towards development, the financial
markets begin to play relatively active role in the financial system. The South
Asian economies are also exhibiting the similar type of economic phenomenon. The
financial systems of all the sample economies are smaller in depth. Some of the
economies of the region like Bangladesh and Sri Lanka have least role of financial
markets in the system. Moreover, due to background of centralized system, the allocation
role of financial system still need to be enhanced as less resources are mobilized
towards private sector. Based on combined score of different indicators of financial
development, it can be inferenced that market-based indicators are boosting the
overall financial development in India and Sri Lanka. In Bangladesh and Pakistan,
financial system is attended by both types of environments. India financial system
has shown much consistent growth over the period of time, but got affected in the
global financial crisis whereas Bangladesh financial system has been able to maintain
robust growth after 2007. Pakistan saw a better development in beginning of twenty
first century but got exposed with the recent crises. Sri Lanka is observed for
various ups and downs in its financial performance for the sample period.
The financial system has emerged as one of the strongest medium of expressing the
economic interest in modern economic system. These economies of South Asian region
are now in the process of modernising their systems through further reforms in the
form of structural adjustment programme. The trends in the financial performance
indicators suggest that the role of financial system in the overall economic activities
has increased in recent years. From the perspective of various dimension of financial
system, these economies are still in evolving stage in relation to developed countries.
The status of financial system has potential to focus on the size, activity, efficiency
and resource allocation pattern to further strengthen their system. The favourable
condition for these economies is that of enjoying the luxury of experiences of developed
countries to introduce financial innovation in their system. These innovations lead
to increase in savings and can accumulate capital, which is the key determinant
of economic growth.
References
Aizenman, Joshua, Yothin Jinjarak, and Donghyun Park. 2015. Financial development
and output growth in developing Asia and Latin America: A comparative sectoral analysis.
NBER Working Paper 20917 National Bureau of Economic Research, Cambridge, Massachusetts.
Anuli Regina Ogbuagu, Dennis Brown Ewubare. 2017. Financial Deepening Implications
for Macro-economic Volatility and Economic Growth in Nigeria, A Multivariate
Approach. International Journal of Economics, Finance and Management Sciences. Vol.
5, No. 1, 2017, pp. 66-80. doi:10.11648/j.ijefm.20170501.16
Asian Development Bank. Key Indicators for Asia and Pacific. Asian Development Outlook,
Various Issues, ADB.
Bagehot, W., 1873. Lombard Street. Homewood, IL: Richard D. Irwin, (1962 Edition).
Beck, T., Levine, R., Kunt, D. A., 1999. A new database on financial development
and structure. Policy Research Working Paper 2146. World Bank.
Bencivenga, V. R., Smith, B. D., 1993. Some consequences of credit rationing in
an endogenous growth model. Journal of Economic Dynamics and Control 17 (1-2), 97-122.
Cheng, Hang-Sheng 1980. Financial deepening in Pacific Basin countries. San Francisco
Federal Reserve Bulletin. pp. 43-56.
Devereux, Michael B., Smith, G. W. 1994. International risk sharing and economic
growth. International Economic Review 35 (4), 535-550.
Diamond, Douglas W., Dybvig, Philip H., 1983. Bank runs, deposit insurance, and
liquidity. Journal of Political Economy. 21(3), 401-419.
Fritz, R.G., 1984. Time series evidence on the causal relationship between financial
deepening and economic development. Journal of Economic Development. 9, 91-111.
George, Edward Y., 1980. New economic indicators for EI Paso. Southwest Business
and Economic Review. 18 (2), 1-44.
Greenwood, J., Jovanovic, B., 1990. Financial development, growth, and the distribution
of income. Journal of Political Economy. 98(5), 1076-1107.
Greenwood, J., Smith, B., 1996. Financial markets in development and the development
of financial markets. Journal of Economic Dynamics and Control. 21(1), 145-181.
Hoskission, R. E., Lorraine E., Chung M. L., Mike W., 2000. Strategy in emerging
economies. The Academy of Management Journal. 43(3), 249-267.
IMF (May 2015). Rethinking Financial Deepening: Stability and Growth in Emerging
Markets, Monetary and Capital Markets Department and Strategy and Policy Review
Department, with inputs from other departments, International Monetary Fund
International Monetary Fund, 2013. International Financial Statistics. CD ROM.
International Monetary Fund. International Financial Statistics Yearbook. World
Economic Outlook (Various Issues), Washington, DC.
King, R. G., Levine, R., 1993. Finance and growth: Schumpeter might be right. Quarterly
Journal of Economics. 108(3), 717-737.
Kunt, A.D., Levine, R., 1999. Bank-based and market-based financial systems: cross
country comparison. Policy Research Working Paper 2143. World Bank.
Levine, R., 1997. Financial development and economic growth: views and agenda. Journal
of Economic Literature. 35(2), 688-726.
Levine, R., Zervos, S., 1998. Stock markets, banks and economic growth. American
Economic Review. 88(3), 537-558.
McKinnon, R., 1973. Money and capital in economic development. Washington, DC, Brookings
Institution.
Schumpeter, J., 1912. The theory of economic development. Cambridge: Harvard University
Press.
Shaw, E. S., 1973. Financial deepening in economic development. New York: Oxford
University Press.
World Bank, 2013. World Development Indicators.
Table 1.1: Economic Performance of South Asian Countries
|
Year
|
GDP Per-capita* (Growth %)
|
GDP* (Growth %)
|
GDS1
|
GFCF1
|
CAB1
|
FDI1
|
|
Bangladesh
|
|
1961-65
|
1.75
|
4.72
|
8.52
|
-
|
-
|
-
|
|
1966-70
|
-0.28
|
2.85
|
8.48
|
-
|
-
|
-
|
|
1971-75
|
-1.99
|
-0.18
|
2.34
|
-
|
-
|
0.02
|
|
1976-80
|
0.69
|
3.22
|
1.46
|
14.50
|
-3.00
|
0.03
|
|
1981-85
|
0.50
|
3.24
|
6.28
|
16.55
|
-2.50
|
0.02
|
|
1986-90
|
0.50
|
3.20
|
9.20
|
16.41
|
-2.10
|
0.00
|
|
1991-95
|
2.25
|
4.60
|
11.98
|
17.52
|
0.10
|
0.02
|
|
1996-2000
|
2.89
|
5.01
|
14.63
|
20.73
|
-0.90
|
0.24
|
|
2001-04
|
3.61
|
5.30
|
17.90
|
23.42
|
0.00
|
0.40
|
|
2005-08
|
5.07
|
6.30
|
17.44
|
24.46
|
1.01
|
1.17
|
|
2009-12
|
5.04
|
6.21
|
16.65
|
24.85
|
1.98
|
0.92
|
|
1961-2012
|
1.74
|
3.99
|
10.23
|
20.30
|
1.43
|
0.28
|
|
India
|
|
1961-65
|
1.40
|
3.49
|
13.90
|
14.31
|
-
|
-
|
|
1966-70
|
2.19
|
4.42
|
13.87
|
14.22
|
-
|
-
|
|
1971-75
|
-0.14
|
2.15
|
16.24
|
14.49
|
-
|
-
|
|
1976-80
|
1.32
|
3.71
|
18.75
|
16.93
|
-0.20
|
0.00
|
|
1981-85
|
3.11
|
5.47
|
18.46
|
19.03
|
0.60
|
0.03
|
|
1986-90
|
3.67
|
5.91
|
21.86
|
21.74
|
-1.30
|
0.06
|
|
1991-95
|
2.68
|
4.70
|
22.75
|
22.55
|
-2.10
|
0.14
|
|
1996-2000
|
4.90
|
6.76
|
23.21
|
23.72
|
-1.20
|
0.62
|
|
2001-04
|
4.49
|
6.16
|
26.26
|
25.55
|
-1.10
|
0.92
|
|
2005-08
|
6.56
|
8.06
|
32.18
|
31.72
|
-1.35
|
2.14
|
|
2009-12
|
5.78
|
7.15
|
30.11
|
30.92
|
-2.73
|
1.96
|
|
1961-2012
|
3.13
|
5.16
|
21.32
|
21.08
|
-1.94
|
0.62
|
Source: Authors’Compilation from WDI and IFS, * Constant 2005 US$, “1” Percent of
GDP (Current US$), Note: - Data Unavailable, GDP: Gross Domestic Product, GFCF:
Gross Fixed Capital Formation, GDS: Gross Domestic Saving, CAB: Current Account
Balance, FDI: Foreign Direct Investment net Inflows.
Table 1.2: Economic Performance of South Asian Countries
|
Year
|
GDP Per-capita* (Growth %)
|
GDP* (Growth %)
|
GDS1
|
GFCF1
|
CAB1
|
FDI1
|
|
Pakistan
|
|
1961-65
|
4.72
|
7.43
|
-
|
19.23
|
-
|
-
|
|
1966-70
|
3.17
|
5.98
|
9.91
|
15.60
|
-
|
-
|
|
1971-75
|
1.79
|
4.65
|
8.85
|
12.91
|
-
|
0.08
|
|
1976-80
|
1.79
|
5.02
|
7.45
|
16.91
|
-0.20
|
0.17
|
|
1981-85
|
3.73
|
7.30
|
7.37
|
17.01
|
0.60
|
0.23
|
|
1986-90
|
3.01
|
6.43
|
9.26
|
16.95
|
-1.30
|
0.43
|
|
1991-95
|
1.76
|
4.54
|
15.42
|
18.13
|
-2.10
|
0.67
|
|
1996-2000
|
0.75
|
3.41
|
14.83
|
15.95
|
-1.20
|
1.09
|
|
2001-04
|
2.40
|
4.36
|
16.85
|
15.26
|
-1.10
|
0.86
|
|
2005-08
|
3.36
|
5.28
|
13.95
|
19.85
|
-5.98
|
3.15
|
|
2009-12
|
1.77
|
3.57
|
8.18
|
13.24
|
-1.30
|
0.89
|
|
1961-2012
|
2.55
|
5.29
|
11.25
|
16.48
|
-3.64
|
0.78
|
|
Sri Lanka
|
|
1961-65
|
0.94
|
3.40
|
12.94
|
12.90
|
-
|
-
|
|
1966-70
|
3.80
|
6.25
|
12.30
|
15.86
|
-
|
-
|
|
1971-75
|
1.47
|
3.13
|
13.47
|
14.60
|
-2.90
|
0.01
|
|
1976-80
|
3.53
|
5.32
|
13.83
|
17.64
|
-4.40
|
0.28
|
|
1981-85
|
3.55
|
5.12
|
13.68
|
28.80
|
-7.50
|
0.96
|
|
1986-90
|
1.63
|
3.17
|
12.20
|
22.91
|
-5.30
|
0.55
|
|
1991-95
|
4.29
|
5.58
|
14.67
|
23.97
|
-5.50
|
1.13
|
|
1996-2000
|
3.62
|
4.94
|
17.31
|
25.25
|
-3.80
|
1.30
|
|
2001-04
|
2.98
|
3.45
|
15.70
|
21.19
|
-1.60
|
1.14
|
|
2005-08
|
5.62
|
6.66
|
16.58
|
24.56
|
-5.46
|
1.63
|
|
2009-12
|
6.42
|
6.55
|
17.53
|
25.58
|
-3.49
|
1.18
|
|
1961-2012
|
3.39
|
4.83
|
14.62
|
21.92
|
-4.62
|
0.88
|
Source: Authors’Compilation from WDI and IFS
