This paper aims to investigate the long-run relationship between financial development and economic growth using panel unit root and panel cointegration analysis in 16 selected low-income countries for the period of 20 years from 1995 to 2014. The long-run relationship has been estimated using fully modified and dynamic OLS techniques. The results show that there exists a cross-sectional dependence across the countries. The Pedroni's panel cointegration analysis provides clear support for the hypothesis that there exists a long-run cointegrating relationship between financial development and economic growth. The long-run panel estimates indicate that financial development has a positive and significant impact on economic growth. For the robustness of the results, this paper has also performed time-series analysis on a single country basis. The results also show the positive impact of financial development on economic growth in the majority of the countries. Likewise, it is found that flow of credit to the private sector is very low in this region of the world. Thus, one of the important policy implications of this study finding is that policy-makers should give more emphasis on the policies that provide a favourable environment for private sector to grow.

Executive Summary A healthy financial system is important for the growth process of an economy. It affects growth by influencing the saving, investment and technological innovations. In fact, researchers argue that low-income countries like Nepal need a much more robust and active financial system when compared to the developed world. Therefore, this study examines the relationship between financial development and economic growth using annual time series data for Nepal during the period 1984–2014. Because Nepal has a bank-based economy, the study used credit issued by banking and financial institutions to the private sector as the proxy for financial development. The economic growth has been measured using real gross domestic product (GDP) growth and real GDP per capita growth (constant 2005 US$). The autoregressive distributed lag (ARDL) bounds testing approach is used to investigate the cointegration among variables in the presence of structural breaks. The study used Zivot and Andrews’ (ZA) unit root test in order to find the structural breaks in the variables. The study finds that the structural change in private credit took place in 2007 when the government of Nepal and Maoists (the then rebels) signed a Comprehensive Peace Agreement and the Maoist rebels joined the interim government, which formally ended the 10 years long civil war in Nepal. Similarly, the study observes break points in real GDP growth and per capita growth in 2001 when the Royal Massacre and a state of emergency took place in Nepal. After allowing for structural breaks, the study finds evidence of a cointegration relationship between financial development and economic growth when economic growth is used as the dependent variable. Thus, it can be argued that the long-run causality is unidirectional from financial development to economic growth in Nepal. The estimates of the ARDL approach suggest that financial development has a significant positive impact on economic growth in both long run and short run. However, the estimates show that gross domestic saving, a control variable, has a negative impact on economic growth in Nepal. It clearly indicates that Nepal has long not been able to utilize the savings in the productive sector. The political instability, poor investment policies and securities and hence the lack of foreign investment and lack of technological innovations could be the causes for Nepal not benefiting from the country’s savings. It is also found that trade openness has a negative relationship with economic growth in the long run: possibly the cause of the persistent trade deficit of Nepal with the rest of the world. However, in the short run, the result shows a positive relationship between trade openness and growth. In fact, it is found that the magnitude of the positive impact of trade openness in the short run is higher than the magnitude of its negative impact in the long run. Thus, the policymakers should give more emphasis on trade and investment policies that could reduce the prolonged trade deficit and help the nation in getting long-term benefits from international trade.

This study analyzes the relationship between savings, investment, and economic growth in Nepal over 1975-2016. The structural breaks in the variables have been accounted for using the (Zivot and Andrews's, J Bus Econ Stat 10: 251-270 1992) unit root test along with (Gregory and Hansen's, Oxf Bull Econ Stat 58: 555-560, 1996) cointegration approach. The ARDL approach to cointegration in the presence of structural breaks has also been utilized to analyze the long-and short-run dynamics of savings, investment, and growth in Nepal. The results show structural breaks in the real GDP per capita during 2001 when the Royal Massacre and a state of emergency have taken place in Nepal. After allowing for this structural break, evidence of a cointegration relationship amongst savings, investment, and economic growth was identified. The estimates of the ARDL approach suggest that investment has a significant and positive impact on economic growth. However, gross domestic savings have a negative impact on growth in the long run. These results clearly show weaknesses of the economy in mobilizing savings into productive sectors.

Purpose The purpose of this paper is to examine the relationship between financial development, openness in financial services trade and economic growth in BRICS countries for the period 1990–2012. Design/methodology/approach An index for financial development has been constructed using principal component analysis technique by including banking sector development, stock market development, bond market development and insurance sector development. For the robustness of the result, the long-run cointegrating relationship amongst the variables has been analyzed. Findings Overall financial development has a positive and significant impact on economic growth. To take the full advantage of openness in financial services trade, countries need to put more emphasis on the development of their stock markets, bond markets and the insurance sector. The result shows that openness in financial services trade has a positive impact on economic growth when the stock market, bond market and insurance sector are included in the system. Research limitations/implications The policy implication of the findings is that policymakers should focus more on developing all four areas of finance to get the full benefit of the financial system on the process of economic growth. Originality/value The authors have constructed the better indicators of financial development in the case of BRICS economies. Most of the studies in BRICS economies have measured the development of the financial sector as either banking sector development or stock market development. However, the present study includes all four areas of finance (banking sector development, stock market development, insurance sector development and bond market development) into account.