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Finance, Institutions and Economic Growth

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  • Panicos Demetriades
  • Siong Hook Law

Abstract

Using data from 72 countries for the period 1978-2000, we find that financial development has larger effects on growth when the financial system is embedded within a sound institutional framework. This is particularly true for poor countries, where more finance without sound institutions is likely to fail in delivering more growth. For these countries, we find that improvements in institutions are likely to deliver much larger direct effects on growth than financial development itself. They are also likely to have positive indirect effects through the financial system, particularly when the latter is already providing large amounts of credit to the private sector. We also find that financial development is most potent in delivering extra growth in middle-income countries. Its effects are particularly large when institutional quality is high. Institutional improvements can also deliver more growth in these countries, especially when the financial system is well developed. Finally, we also find that while the effects of financial development in high-income countries are much smaller than in middle-income countries, even in these countries financial development has larger effects on growth when institutional quality is high.

Suggested Citation

  • Panicos Demetriades & Siong Hook Law, 2004. "Finance, Institutions and Economic Growth," Discussion Papers in Economics 04/5, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:04/5
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp04-5.pdf
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    References listed on IDEAS

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
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    Cited by:

    1. Watanabe, Mariko, 2011. "Competition of the mechanisms : how Chinese home appliance firms coped with default risk of trade credit?," IDE Discussion Papers 312, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Ito, Seiro & Watanabe, Mariko & Yanagawa, Noriyuki, 2007. "Financial Aspects of Transactions with FDI: Trade Credit Provision by SMEs in China," IDE Discussion Papers 99, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    3. denise Gisèle MEGNIGANG, 2021. "Développement du système financier et croissance économique," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 12(2), pages 50-72, December.
    4. Xu, Cheng-Gang & Tong, Jian, 2004. "Financial Institutions and the Wealth of Nations: Tales of Development," CEPR Discussion Papers 4348, C.E.P.R. Discussion Papers.
    5. Magloire LANHA, 2022. "Les institutions influencent-elles la relation," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 55, pages 5-22.
    6. Tong, Jian & Xu, Chenggang, 2003. "Financial institutions and the wealth of nations: tales of development," Discussion Paper Series In Economics And Econometrics 0404, Economics Division, School of Social Sciences, University of Southampton.
    7. ITOH Seiro & WATANABE Mariko & YANAGAWA Noriyuki, 2007. "Enforceability in Trade Credit: Financial Aspects of Transactions with FDI," Discussion papers 07031, Research Institute of Economy, Trade and Industry (RIETI).
    8. Theodore Murindahabi & Qiang Li & Eric Nisingizwe & E.M.B.P. Ekanayake, 2019. "Do coffee exports have impact on long-term economic growth of countries?," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 65(8), pages 385-393.
    9. Alexandru MINEA & Patrick VILLIEU, 2010. "DeVELOPPEMENT FINANCIER, QUALITe INSTITUTIONNELLE ET CROISSANCE : UN MODeLE SIMPLE AVEC EFFETS DE SEUIL," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 32, pages 31-58.
    10. Pappas, Anastasios, 2010. "Capital mobility and growth: Evidence from Greece," MPRA Paper 29105, University Library of Munich, Germany.
    11. Jean-Pierre Allegret & Sana Azzabi, 2012. "Développement financier, croissance de long terme et effets de seuil," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(5), pages 553-581.
    12. Jean-Pierre Allegret & Sana Azzabi, 2012. "Développement financier, croissance de long terme et effets de seuil," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(5), pages 553-581, December.
    13. Tong, Jian & Xu, Chenggang, 2003. "Financial institutions and the wealth of nations: tales of development," Discussion Paper Series In Economics And Econometrics 404, Economics Division, School of Social Sciences, University of Southampton.
    14. Panicos O. Demetriades & Svetlana Andrianova, 2005. "Sources and Effectiveness of Financial Development: What We Know and What We Need to Know," WIDER Working Paper Series RP2005-76, World Institute for Development Economic Research (UNU-WIDER).
    15. Chiraz Feki & Sirine Mnif, 2016. "Entrepreneurship, Technological Innovation, and Economic Growth: Empirical Analysis of Panel Data," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 7(4), pages 984-999, December.
    16. Anupam Das & Syeed Khan, 2016. "Financial Development and Output: A Synthesis of Time Series Cointegration and Causality Tests for Bangladesh," South Asian Journal of Macroeconomics and Public Finance, , vol. 5(2), pages 113-132, December.
    17. Abdelkarim Yahyaoui & Atef Rahmani, 2009. "Financial Development and Economic Growth: Role of Institutional Quality," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 327-357, September.

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