Financial development and economic growth: evidence from emerging African and Asian countries

The connection between financial development (FSD) and economic growth has been the focus of both theoretical and empirical research. However, the specific nature of this relationship depends on factors such as the level of economic development, the extent of financial activities, and integration into the global financial system. The aim of this study is, therefore, to investigate the link between FSD and economic growth in the context of 22 emerging African and Asian countries. And both descriptive and econometric analyses were conducted using panel data from 1981 to 2021. Besides, the study used the Dynamic Common Correlation Effect (DCCE) model, which takes into account cross-sectional dependency, allows for parameter variation, and combines the characteristics of both MG and PMG. The descriptive results indicate that emerging Asian countries have a relatively higher FSD level than emerging African countries, with the average FSD for the sampled emerging countries being 23.74 percent; for emerging Asian countries, it is 30.98 percent; and for emerging African countries, it is 17.71 percent. Furthermore, the econometrics results show that FSD has a positive but negligible influence on the growth of emerging Asian and African nations, suggesting that although there is rapid and sustainable growth, the current level of FSD is insufficient to sustain this trajectory. Thus, among the crucial policy options that policymakers should implement to improve financial sector development and sustain economic growth in emerging African and Asian countries are strengthening institutions, financial openness and liberalization, improving technologies, and digitalizing economies.‘By 2050, 19 of the top 30 world economies will be the ones known today as emerging economies’. According to world economics, the GDP of emerging economies is more than 40 trillion USD, or half of the global GDP in 2023 and 69% of the global GDP growth between 2013 and 2023. Empirical research indicates that stable and effective financial systems, or financial development, including banks and capital markets, are advantageous for economic growth. This is particularly true for developing nations in Asia and Africa, where the financial systems are still less competitive than those in developed nations and are often fragmented and monopolized by the state. In addition, some of these developing nations are currently waiting for the prosperity of Western economies and are immobilized by the sovereign debt crisis in order to capitalize on their economic advantages and seize new markets. Thus, from 1981 to 2021, this study looks into the relationship between FSD and economic growth in Asian and African nations. Through the findings of this study, we contribute to the actualization of the 2050 world economy projection, which predicts the economic power of newly emerging countries. Furthermore, we make readily available evidence-based information for rational and knowledgeable policymakers through our research. As a result, we think that our research strengthens economies not only in Asia and Africa but also in other parts of the world.