Size Effects on the Transmission Mechanism from Finance to Development: A Study of Large Emerging Economies

Abstract

Large emerging economies, typically Brazil, India, China and South Africa (BICS), demonstrate a strong upward trend in many aspects of their macroeconomic performance in recent decades. This surge is attributed to ‘size effects’ whereby economies of scale and scope, and agglomeration impact, create productivity improvements. This paper concentrates on both conceptual and empirical studies about the most important contributions from real and financial sectors towards economic growth in large emerging economies. In particular, the transmission channels from finance to growth are discussed in this paper, to show how size effects can affect these transmission mechanisms from finance to development. The econometric estimations use a structural vector autoregressive (SVAR) model for four specific large emerging economies – BICS – and analyse dynamic shocks from real sectors and financial sectors, together with size‐effect variables: education investment, government spending and military expenditures. We conclude that real shocks have much higher impact effects on output and growth compared to financial shocks.

How do financial globalization, institutions and economic growth impact financial sector development in European countries?

“…Subsequently, many studies have come up in stating that the development of both baking sector and stock market (financial development) plays a vital role in enhancing the long-run growth of an economy (Rajan and Zingales 1998, Levin 2003, Liu and Hsu 2006, Ang 2008, Fung 2009, Sun et al 2011, Hsueh et al 2013. Moreover, Chinn and Ito (2006) argue that better institutional quality will enable countries to harvest the long-run growth effect of financial development.…”

“…In a similar vein, Mishkin (2009) also argues that globalization will bring necessary promotion of greater financial development for an economy with the help of strong institutional quality. In contrast, the recent global financial crisis (2007)(2008)(2009) has also acknowledged the consequence of greater financial development originated in developed countries on economic development of other countries (Sun et al 2011, Law and Singh 2014, Law et al 2015. In this context, an important question needs to be asked here: why few countries are remaining financially underdeveloped or are prone to the consequences of financial crisis despite having their better financial system?…”

“…This is primarily due to the fact that the lack of prudent measures and institutional quality may increase the risk of financial intermediation following a collapse in the value of financial assets. These circumstances are the latest episode of the recent US sub-prime crisis and global economic recessions which rationally provided a motivation for empirically understanding the impact of financial development on economic growth in developed economies (Sun et al 2011, Naceur et al 2014, Law et al 2015.…”

Globalisation, Institutional Reforms and Financial Development in East Asian Economies

“…At the global level, financial development often has grown along with international economic integration over the last several decades. Sun et al (2011) argue that the most recent global economic recessions of this century have provided a sound platform for reassessing the impact of finance on economic development, particularly in the areas of international trade and investment. Recent developments in the field of financial economics have also led to a renewed interest in the opennessfinancial development nexus.…”

Is globalization detrimental to financial development? Further evidence from a very large emerging economy with significant orientation towards policies

“…banking sector and stock market) is assumed to be one of the potential channels of enhancing economic growth across countries (Levin 1997, 2003, Rajan and Zingales 1998, Ang 2008a, b, Beck et al 2000, Liu and Hsu 2006, Fung 2009, Sun et al 2011, Hsueh et al 2013. By contrast, the recent literature on the global economic crisis of 2007-09 has recognized the adverse consequence of financial system development on economic growth and development (Sun et al 2011, Law and Singh 2014, Law et al 2015. Given these developments, an important question that arises here is: why are so many countries still either remaining financially under-developed or are remaining quite vulnerable to financial crises despite the existence of a robust financial system activity around the world?…”