Financial Globalization and Growth: The Impacts of Financial Development and Governance
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Abstract
The conventional theory suggests that financial globalization encourages growth. The empirical literature, however, does not give convincing support for the theoretical benefits of financial globalization. This paper investigates the relationship between financial globalization and growth in a sample of 33 emerging market economies during the 1995-2019 period by considering both de facto and de jure measures of financial globalization. We first study the direct effect of financial globalization on growth. Then, we focus on whether the growth impact of financial globalization is conditional on the level of financial development and governance. Our two-step system GMM estimation results suggest that both financial globalization measures tend to lower growth, albeit this negative relationship mitigates after the global financial crisis. Our empirical findings also indicate that the negative growth impact of financial globalization diminishes with the high levels of financial development and governance. The results indicate that investing and upgrading the collateral environment cause higher growth and mitigate the negative growth impact of financial globalization.
JEL classification: F02, F41, F43, F63.
Keywords: Financial globalization, Growth, Governance, Financial Development, Generalized Method of Moments
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Taşdemir, F. (2023) “Financial Globalization and Growth: The Impacts of Financial Development and Governance”, World Journal of Applied Economics, 9(1), pp. 99-111. doi: 10.22440/wjae.9.1.5.
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References
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Batuo, M., Mlambo, K., & Asongu, S. (2018). Linkages between financial development, financial instability, financial liberalisation and economic growth in Africa. Research in International Business and Finance, 45, 168-179. doi:10.1016/j.ribaf.2017.07.148
Bond, S. R. (2002). Dynamic panel data models: a guide to micro data methods and practice. Portuguese Economic Journal, 1, 141-162. doi:10.1007/s10258-002-0009-9
Bond, S. R., Hoeffler, A., & Temple, J. (2001). GMM Estimation of Empirical Growth Models. Discussion Papers, CEPR.
Bonfiglioli, A. (2008). Financial integration, productivity and capital accumulation. Journal of International Economics, 76, 337-355. doi:10.1016/j.jinteco.2008.08.001
Bordo, M. D., & Meissner, C. M. (2015). Growing up to stability? Financial globalization, financial development and financial crises. Working Paper, National Bureau of Economic Research. doi:10.3386/w21287
Bortz, P. G., & Kaltenbrunner, A. (2018). The International Dimension of Financialization in Developing and Emerging Economies. Development and Change, 49, 375-393. doi:10.1111/dech.12371
Boucekkine, R., Fabbri, G., & Pintus, P. A. (2018). Short-run pain, long-run gain: the conditional welfare gains from international financial integration. Economic Theory, 65, 329-360. doi:10.1007/s00199-016-1019-7
Broner, F., & Ventura, J. (2016). Rethinking the effects of financial globalization. The Quarterly Journal of Economics, 131, 1497-1542. doi:10.1093/qje/qjw010
Caselli, F., Esquivel, G., & Lefort, F. (1996). Reopening the convergence debate: a new look at cross-country growth empirics. Journal of Economic Growth, 1, 363-389. doi:10.1007/BF00141044
Chen, J., & Quang, T. (2014). The impact of international financial integration on economic growth: New evidence on threshold effects. Economic Modelling, 42, 475-489. doi:10.1016/j.econmod.2014.06.011
Chinn, M. D., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10, 309-322. doi:10.1080/13876980802231123
De la Torre, A., Yeyati, E. L., & Schmukler, S. L. (2002). Financial Globalization: Unequal Blessings. International Finance, 5, 335-357. doi:10.1111/1468-2362.00100
De Nicolo, G., & Juvenal, L. (2014). Financial integration, globalization, and real activity. Journal of Financial Stability, 10, 65-75. doi:10.1016/j.jfs.2013.04.004
Edison, H. J., Levine, R., Ricci, L., & Sløk, T. (2002). International financial integration and economic growth. Journal of International Money and Finance, 21, 749-776. doi:10.1016/S0261-5606(02)00021-9
Epaulard, A., & Pommeret, A. (2016). Financial integration, growth and volatility. Pacific Economic Review, 21, 330-357. doi:10.1111/1468-0106.12177
Faria, A., Mauro, P., & Zaklan, A. (2011). The external financing of emerging markets—evidence from two waves of financial globalization. Review of Finance, 15, 207-243. doi:10.1093/rof/rfq016
Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105, 3150-82. doi:10.1257/aer.20130954
Ffrench-Davis, R., & Griffith-Jones, S. (2019). Financial Globalization and Its Implications for Development. In M. Nissanke, & J. A. Ocampo (Eds.), The Palgrave Handbook of Development Economics (pp. 697-726). Palgrave Macmillan, Cham. . doi:10.1007/978-3-030-14000-7_20
Gaies, B., Goutte, S., & Guesmi, K. (2020). Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates. Research in International Business and Finance, 52, 101113. doi:10.1016/j.ribaf.2019.101113
Ghosh, A. (2017). How does banking sector globalization affect economic growth? International Review of Economics & Finance, 48, 83-97. doi:10.1016/j.iref.2016.11.011
Hammudeh, S., Sohag, K., Husain, S., Husain, H., & Said, J. (2020). Nonlinear relationship between economic growth and nuances of globalisation with income stratification: Roles of financial development and governance. Economic Systems, 44, 100761. doi:10.1016/j.ecosys.2020.100761
Inekwe, J. N., & Valenzuela, M. R. (2020). Financial integration and banking crisis. A critical analysis of restrictions on capital flows. The World Economy, 43, 506-527. doi:10.1111/twec.12855
Islam, N. (1995). Growth empirics: a panel data approach. The Quarterly Journal of Economics, 110, 1127-1170. doi:10.2307/2946651
Joyce, J. P. (2011). Financial globalization and banking crises in emerging markets. Open Economies Review, 22, 875-895. doi:10.1007/s11079-010-9179-8
Kimakova, A. (2009). Government size and openness revisited: the case of financial globalization. Kyklos, 62, 394-406. doi:10.1111/j.1467-6435.2009.00442.x
Kose, M. A., Prasad, E. S., & Taylor, A. D. (2011). Thresholds in the process of international financial integration. Journal of International Money and Finance, 30, 147-179. doi:10.1016/j.jimonfin.2010.08.005
Kose, M. A., Prasad, E., Rogoff, K., & Wei, S.-J. (2010). Financial Globalization and Economic Policies. In D. Rodrik, & M. Rosenzweig (Eds.), Handbook of Development Economics (Vol. 5, pp. 4283-4359). Elsevier. doi:10.1016/B978-0-444-52944-2.00003-3
Lane, P. R. (2013). Financial globalisation and the crisis. Open Economies Review, 24, 555-580. doi:10.1007/s11079-012-9266-0
Lane, P. R., & Milesi-Ferretti, G. M. (2018). The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis. IMF Economic Review, 66, 189-222. doi:10.1057/s41308-017-0048-y
Law, S. H., Tan, H. B., & Azman-Saini, W. N. (2015). Globalisation, institutional reforms and financial development in East Asian economies. The World Economy, 38, 379-398. doi:10.1111/twec.12168
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1-24. doi:10.1016/S0304-4076(01)00098-7
Levine, R. (2001). International financial liberalization and economic growth. Review of International Economics, 9, 688-702. doi:10.1111/1467-9396.00307
Martin, P., & Rey, H. (2006). Financial globalization and emerging markets: With or without crash? The American Economic Review, 96, 1631-1651. doi:10.1257/aer.96.5.1631
McQuade, P., & Schmitz, M. (2017). The great moderation in international capital flows: A global phenomenon? Journal of International Money and Finance, 73, 188-212. doi:10.1016/j.jimonfin.2017.02.027
Meller, B. (2013). The two-sided effect of financial globalization on output volatility. Review of World Economics, 149, 477-504. doi:10.1007/s10290-013-0156-3
Nasreen, S., Mahalik, M. K., Shahbaz, M., & Abbas, Q. (2020). How do financial globalization, institutions and economic growth impact financial sector development in European countries? Research in International Business and Finance, 54, 101247. doi:10.1016/j.ribaf.2020.101247
Obstfeld, M. (2009). International finance and growth in developing countries: what have we learned? IMF Staff Papers, 56, 63-111. doi:10.5089/9781589067943.024
Owen, A. L., & Pereira, J. M. (2018). Bank concentration, competition, and financial inclusion. Review of Development Finance, 8, 1-17. doi:10.1016/j.rdf.2018.05.001
Pasricha, G. K., & Nier, E. (2022). Review of The Institutional View on The Liberalization and Management of Capital Flows—Background Note on Capital Flows and Capital Flow Management Measures—Benefits and Costs. Policy Papers, International Monetary Fund.
Prasad, E. S., Rogoff, K., Wei, S.-J., & Köse, M. A. (2007). Financial Globalization, Growth and Volatility in Developing Countries. In A. Harrison (Ed.), Globalization and Poverty (pp. 457-516). University of Chicago Press.
Rajan, R., & Zingales, L. (1998). Financial Dependence and Growth. American Economic Review, 88, 559-86.
Rodrik, D., & Subramanian, A. (2009). Why did financial globalization disappoint? IMF Staff Papers, 56, 112-138. doi:10.1057/imfsp.2008.29
Roodman, D. (2009). A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71, 135-158. doi:10.1111/j.1468-0084.2008.00542.x
Rousseau, P. L., & Sylla, R. (2003). Financial systems, economic growth, and globalization. In M. D. Bordo, A. M. Taylor, & J. G. Williamson (Eds.), Globalization in Historical Perspective (pp. 373-416). University of Chicago Press.
Saidi, H., Rachdi, H., & Mgadmi, N. (2017). Revisiting the role of governance and institutions in the impact of financial liberalization on economic growth using the PSTR model. Panoeconomicus, 64, 315-336. doi:10.2298/PAN141016013S
Schmukler, S. L. (2004). Financial Globalization: Gain and Pain for Developing Countries. Federal Reserve Bank of Atlanta Economic Review, 89, 39-66.
Schularick, M., & Steger, T. M. (2010). Financial integration, investment, and economic growth: evidence from two eras of financial globalization. The Review of Economics and Statistics, 92, 756-768. doi:10.1162/REST_a_00027
Svirydzenka, K., & Brooks, P. K. (2016). Introducing a New Broad-based Index of Financial Development. Working Paper, International Monetary Fund.
Tobin, J. (2000). Financial globalization. World Development, 28, 1101-1104. doi:10.1016/S0305-750X(00)00008-5
Wei, S.-J. (2006). Connecting two views on financial globalization: Can we make further progress? Journal of the Japanese and International Economies, 20, 459-481. doi:10.1016/j.jjie.2006.06.003
Wei, S.-J. (2018). Managing financial globalization: Insights from the recent literature. Working Paper, National Bureau of Economic Research. doi:10.3386/w24330
Yolcu Karadam, D., & Ocal, N. (2022). Analysis of distinct asymmetries in financial integration-growth nexus for industrial, emerging and developing countries. International Journal of Finance & Economics, 27, 2326-2344. doi:10.1002/ijfe.2275
Zheng, M., Feng, G.-F., Wang, Q.-J., & Chang, C.-P. (2023). Financial globalization and technological innovation: International evidence. Economic Systems, 47, 101048. doi:10.1016/j.ecosys.2022.101048
Aluko, O. A., & Opoku, E. E. (2022). The financial development impact of financial globalization revisited: A focus on OECD countries. International Economics, 169, 13-29. doi:10.1016/j.inteco.2021.11.001
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58, 277-297. doi:10.2307/2297968
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68, 29-51. doi:10.1016/0304-4076(94)01642-D
Batuo, M., Mlambo, K., & Asongu, S. (2018). Linkages between financial development, financial instability, financial liberalisation and economic growth in Africa. Research in International Business and Finance, 45, 168-179. doi:10.1016/j.ribaf.2017.07.148
Bond, S. R. (2002). Dynamic panel data models: a guide to micro data methods and practice. Portuguese Economic Journal, 1, 141-162. doi:10.1007/s10258-002-0009-9
Bond, S. R., Hoeffler, A., & Temple, J. (2001). GMM Estimation of Empirical Growth Models. Discussion Papers, CEPR.
Bonfiglioli, A. (2008). Financial integration, productivity and capital accumulation. Journal of International Economics, 76, 337-355. doi:10.1016/j.jinteco.2008.08.001
Bordo, M. D., & Meissner, C. M. (2015). Growing up to stability? Financial globalization, financial development and financial crises. Working Paper, National Bureau of Economic Research. doi:10.3386/w21287
Bortz, P. G., & Kaltenbrunner, A. (2018). The International Dimension of Financialization in Developing and Emerging Economies. Development and Change, 49, 375-393. doi:10.1111/dech.12371
Boucekkine, R., Fabbri, G., & Pintus, P. A. (2018). Short-run pain, long-run gain: the conditional welfare gains from international financial integration. Economic Theory, 65, 329-360. doi:10.1007/s00199-016-1019-7
Broner, F., & Ventura, J. (2016). Rethinking the effects of financial globalization. The Quarterly Journal of Economics, 131, 1497-1542. doi:10.1093/qje/qjw010
Caselli, F., Esquivel, G., & Lefort, F. (1996). Reopening the convergence debate: a new look at cross-country growth empirics. Journal of Economic Growth, 1, 363-389. doi:10.1007/BF00141044
Chen, J., & Quang, T. (2014). The impact of international financial integration on economic growth: New evidence on threshold effects. Economic Modelling, 42, 475-489. doi:10.1016/j.econmod.2014.06.011
Chinn, M. D., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10, 309-322. doi:10.1080/13876980802231123
De la Torre, A., Yeyati, E. L., & Schmukler, S. L. (2002). Financial Globalization: Unequal Blessings. International Finance, 5, 335-357. doi:10.1111/1468-2362.00100
De Nicolo, G., & Juvenal, L. (2014). Financial integration, globalization, and real activity. Journal of Financial Stability, 10, 65-75. doi:10.1016/j.jfs.2013.04.004
Edison, H. J., Levine, R., Ricci, L., & Sløk, T. (2002). International financial integration and economic growth. Journal of International Money and Finance, 21, 749-776. doi:10.1016/S0261-5606(02)00021-9
Epaulard, A., & Pommeret, A. (2016). Financial integration, growth and volatility. Pacific Economic Review, 21, 330-357. doi:10.1111/1468-0106.12177
Faria, A., Mauro, P., & Zaklan, A. (2011). The external financing of emerging markets—evidence from two waves of financial globalization. Review of Finance, 15, 207-243. doi:10.1093/rof/rfq016
Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105, 3150-82. doi:10.1257/aer.20130954
Ffrench-Davis, R., & Griffith-Jones, S. (2019). Financial Globalization and Its Implications for Development. In M. Nissanke, & J. A. Ocampo (Eds.), The Palgrave Handbook of Development Economics (pp. 697-726). Palgrave Macmillan, Cham. . doi:10.1007/978-3-030-14000-7_20
Gaies, B., Goutte, S., & Guesmi, K. (2020). Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates. Research in International Business and Finance, 52, 101113. doi:10.1016/j.ribaf.2019.101113
Ghosh, A. (2017). How does banking sector globalization affect economic growth? International Review of Economics & Finance, 48, 83-97. doi:10.1016/j.iref.2016.11.011
Hammudeh, S., Sohag, K., Husain, S., Husain, H., & Said, J. (2020). Nonlinear relationship between economic growth and nuances of globalisation with income stratification: Roles of financial development and governance. Economic Systems, 44, 100761. doi:10.1016/j.ecosys.2020.100761
Inekwe, J. N., & Valenzuela, M. R. (2020). Financial integration and banking crisis. A critical analysis of restrictions on capital flows. The World Economy, 43, 506-527. doi:10.1111/twec.12855
Islam, N. (1995). Growth empirics: a panel data approach. The Quarterly Journal of Economics, 110, 1127-1170. doi:10.2307/2946651
Joyce, J. P. (2011). Financial globalization and banking crises in emerging markets. Open Economies Review, 22, 875-895. doi:10.1007/s11079-010-9179-8
Kimakova, A. (2009). Government size and openness revisited: the case of financial globalization. Kyklos, 62, 394-406. doi:10.1111/j.1467-6435.2009.00442.x
Kose, M. A., Prasad, E. S., & Taylor, A. D. (2011). Thresholds in the process of international financial integration. Journal of International Money and Finance, 30, 147-179. doi:10.1016/j.jimonfin.2010.08.005
Kose, M. A., Prasad, E., Rogoff, K., & Wei, S.-J. (2010). Financial Globalization and Economic Policies. In D. Rodrik, & M. Rosenzweig (Eds.), Handbook of Development Economics (Vol. 5, pp. 4283-4359). Elsevier. doi:10.1016/B978-0-444-52944-2.00003-3
Lane, P. R. (2013). Financial globalisation and the crisis. Open Economies Review, 24, 555-580. doi:10.1007/s11079-012-9266-0
Lane, P. R., & Milesi-Ferretti, G. M. (2018). The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis. IMF Economic Review, 66, 189-222. doi:10.1057/s41308-017-0048-y
Law, S. H., Tan, H. B., & Azman-Saini, W. N. (2015). Globalisation, institutional reforms and financial development in East Asian economies. The World Economy, 38, 379-398. doi:10.1111/twec.12168
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1-24. doi:10.1016/S0304-4076(01)00098-7
Levine, R. (2001). International financial liberalization and economic growth. Review of International Economics, 9, 688-702. doi:10.1111/1467-9396.00307
Martin, P., & Rey, H. (2006). Financial globalization and emerging markets: With or without crash? The American Economic Review, 96, 1631-1651. doi:10.1257/aer.96.5.1631
McQuade, P., & Schmitz, M. (2017). The great moderation in international capital flows: A global phenomenon? Journal of International Money and Finance, 73, 188-212. doi:10.1016/j.jimonfin.2017.02.027
Meller, B. (2013). The two-sided effect of financial globalization on output volatility. Review of World Economics, 149, 477-504. doi:10.1007/s10290-013-0156-3
Nasreen, S., Mahalik, M. K., Shahbaz, M., & Abbas, Q. (2020). How do financial globalization, institutions and economic growth impact financial sector development in European countries? Research in International Business and Finance, 54, 101247. doi:10.1016/j.ribaf.2020.101247
Obstfeld, M. (2009). International finance and growth in developing countries: what have we learned? IMF Staff Papers, 56, 63-111. doi:10.5089/9781589067943.024
Owen, A. L., & Pereira, J. M. (2018). Bank concentration, competition, and financial inclusion. Review of Development Finance, 8, 1-17. doi:10.1016/j.rdf.2018.05.001
Pasricha, G. K., & Nier, E. (2022). Review of The Institutional View on The Liberalization and Management of Capital Flows—Background Note on Capital Flows and Capital Flow Management Measures—Benefits and Costs. Policy Papers, International Monetary Fund.
Prasad, E. S., Rogoff, K., Wei, S.-J., & Köse, M. A. (2007). Financial Globalization, Growth and Volatility in Developing Countries. In A. Harrison (Ed.), Globalization and Poverty (pp. 457-516). University of Chicago Press.
Rajan, R., & Zingales, L. (1998). Financial Dependence and Growth. American Economic Review, 88, 559-86.
Rodrik, D., & Subramanian, A. (2009). Why did financial globalization disappoint? IMF Staff Papers, 56, 112-138. doi:10.1057/imfsp.2008.29
Roodman, D. (2009). A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71, 135-158. doi:10.1111/j.1468-0084.2008.00542.x
Rousseau, P. L., & Sylla, R. (2003). Financial systems, economic growth, and globalization. In M. D. Bordo, A. M. Taylor, & J. G. Williamson (Eds.), Globalization in Historical Perspective (pp. 373-416). University of Chicago Press.
Saidi, H., Rachdi, H., & Mgadmi, N. (2017). Revisiting the role of governance and institutions in the impact of financial liberalization on economic growth using the PSTR model. Panoeconomicus, 64, 315-336. doi:10.2298/PAN141016013S
Schmukler, S. L. (2004). Financial Globalization: Gain and Pain for Developing Countries. Federal Reserve Bank of Atlanta Economic Review, 89, 39-66.
Schularick, M., & Steger, T. M. (2010). Financial integration, investment, and economic growth: evidence from two eras of financial globalization. The Review of Economics and Statistics, 92, 756-768. doi:10.1162/REST_a_00027
Svirydzenka, K., & Brooks, P. K. (2016). Introducing a New Broad-based Index of Financial Development. Working Paper, International Monetary Fund.
Tobin, J. (2000). Financial globalization. World Development, 28, 1101-1104. doi:10.1016/S0305-750X(00)00008-5
Wei, S.-J. (2006). Connecting two views on financial globalization: Can we make further progress? Journal of the Japanese and International Economies, 20, 459-481. doi:10.1016/j.jjie.2006.06.003
Wei, S.-J. (2018). Managing financial globalization: Insights from the recent literature. Working Paper, National Bureau of Economic Research. doi:10.3386/w24330
Yolcu Karadam, D., & Ocal, N. (2022). Analysis of distinct asymmetries in financial integration-growth nexus for industrial, emerging and developing countries. International Journal of Finance & Economics, 27, 2326-2344. doi:10.1002/ijfe.2275
Zheng, M., Feng, G.-F., Wang, Q.-J., & Chang, C.-P. (2023). Financial globalization and technological innovation: International evidence. Economic Systems, 47, 101048. doi:10.1016/j.ecosys.2022.101048