nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2020‒03‒16
nineteen papers chosen by
Georg Man

  2. Financial Development, Economic Performance and Democracy By Zhenxiong Li; Hilary Ingham
  3. Monetary policy and bank lending in developing countries: loan applications, rates, and real effects By Charles Abuka; Ronnie K. Alinda; Camelia Minoiu; José-Luis Peydró; Andrea F. Presbitero
  4. Buying and Selling Entrepreneurial Assets By Kankanamge, Sumudu; Gaillard, Alexandre
  5. Industrial Growth in Sub-Saharan Africa: Evidence from Machine Learning with Insights from Nightlight Satellite Images By Christian S. Otchia; Simplice A. Asongu
  6. Agricultural Credits and Agricultural Productivity: Cross-Country Evidence By Seven, Unal; Tumen, Semih
  7. New Insight into the Causal Linkage between Economic Expansion, FDI, Coal consumption, Pollutant emissions and Urbanization in South Africa By Udi Joshua; Festus V. Bekun; Samuel A. Sarkodie
  8. Compte capital et développement financier en Tunisie : Causalité et relation de long terme By Mohamed Gritli; Serge Rey
  9. The Role of Asymmetry and Uncertainties in the Capital Flows- Economic Growth Nexus By Ibrahim D. Raheem; Sara le Roux; Simplice A. Asongu
  10. Drivers of Gross Capital Inflows : Which Factors Are More Important for Sub-Saharan Africa? By Calderon,Cesar; Chuhan-Pole,Punam; Kubota,Megumi
  11. Global Macro-Financial Cycles and Spillovers By Ha, Jongrim; Kose, M. Ayhan; Otrok, Christopher; Prasad, Eswar
  12. Mobilization Effects of Multilateral Development Banks By Broccolini,Chiara; Lotti,Giulia; Maffioli,Alessandro; Presbitero,Andrea F.; Stucchi,Rodolfo Mario
  13. Financial Access, Governance and Insurance Sector Development in Sub-Saharan Africa By Simplice A. Asongu; Nicholas M. Odhiambo
  14. Financial Inclusion in the Europe and Central Asia Region : Recent Trends and a Research Agenda By Demirguc-Kunt,Asli; Hu,Bingjie; Klapper,Leora
  15. The Rise of Domestic Capital Markets for Corporate Financing By Abraham,Facundo; Cortina Lorente,Juan Jose; Schmukler,Sergio L.
  16. Financial Constraints and Small and Medium Enterprises: A Review By Bakhtiari, Sasan; Breunig, Robert; Magnani, Lisa; Zhang, Jacquelyn
  17. Financial constraints, factor combination and Gibrat's law in Africa By Florian Leon; Samuel Monteiro
  18. Trade shocks and credit reallocation By Rappoport, Veronica; Federico, Stefano; Hassan, Fadi
  19. The Cultural Origin of Saving Behavior By Costa-Font, Joan; Giuliano, Paola; Ozcan, Berkay

  1. By: Shahzad Ijaz (Capital University of Science & Technology); Arshad Hassan (Capital University of Science & Technology); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Ahmad Fraz (Capital University of Science & Technology)
    Abstract: This paper investigates the effect of bank competition and financial stability on economic growth by examining panel-data from 38 European countries over 2001 to 2017. Bank competition is measured with the Boone indicator, and bank stability with Z-scores and non-performing loan ratio, all at the country level. This study employs a fixed-effect estimator, as well as a system generalized method of moment (GMM) estimator to control unobserved heterogeneity, endogene-ity, the dynamic effect of economic growth, and reverse causality in its estimation. Results show that bank stability significantly contributes to economic growth in Europe. Economic growth falls during crisis periods (both the global financial crisis and the local banking crisis), highlighting the importance of a resilient banking system during crisis periods. Moreover, empirical outcomes show that lower banking competition supports economic growth and increases financial stability. This study provides a framework for banks and regulators to boost economic growth through the channel of banking stability.
    Keywords: non-performing loans,channeling effect,bank stability,bank competition,economic growth,system GMM,global financial crisis,local banking crisis,bank Z-score
    Date: 2020
  2. By: Zhenxiong Li; Hilary Ingham
    Abstract: This paper investigates the long-term effect of financial development on economic growth using annual data for 67 countries over the period 1971 to 2007. Both autoregressive distributed lag (ARDL) and cross-sectionally augmented autoregressive distributed lag (CS-ARDL) models are applied to count for crosscountry heterogeneity and error cross-country dependence. The results uphold a positive and significant effect of financial development on long-run per capita output. There is also some evidence of a non-linear relationship between financial development and growth. However, the analysis also reveals that the results derive primarily from non-democratic countries.
    Keywords: Economic growth, Financial development, Democracy
    JEL: O16 O43 P16
    Date: 2020
  3. By: Charles Abuka; Ronnie K. Alinda; Camelia Minoiu; José-Luis Peydró; Andrea F. Presbitero
    Abstract: Recent studies of monetary policy in developing countries document a weak bank lending channel based on aggregate data. In this paper, we bring new evidence using Uganda’s supervisory credit register, with microdata on loan applications, volumes and rates, coupled with unanticipated variation in monetary policy. We show that a monetary contraction reduces bank credit supply—increasing loan application rejections and tightening loan volume and rates—especially for banks with more leverage and sovereign debt exposure. There are associated spillovers on inflation and economic activity—including construction permits and trade—and even social unrest.
    Keywords: Bank lending channel of monetary policy; bank credit; real effects; credit register; developing countries
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2018–11
  4. By: Kankanamge, Sumudu; Gaillard, Alexandre
    Abstract: This paper introduces a theory of entrepreneurial assets transfer consistent with empirical evidence and centered around a business for sale market that values firms based on their intangible assets. We consider the key endogenous entrepreneurial choices to purchase, found, sell or liquidate business assets and the equilibrium price designed to capture both the intertemporal and the intangible value of a firm. We distinguish earlystage and mature firms as the latter are less likely to fail, make higher profits and face less stringent financial constraints. We argue that maturity translates the intangible value of a firm. We discipline our model using U.S. surveys and a new dataset of business selling transactions. We show that the absence of the business for sale market leads to a severe drop in aggregate output. Then, decomposing the effects of maturity, we show how they shape aggregate outcomes and wealth concentration.
    Keywords: Entrepreneurship, Business transfers, Intangible Assets
    JEL: E21 E23 J24
    Date: 2020–02
  5. By: Christian S. Otchia (Hyogo, Japan); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study uses nightlight time data and machine learning techniques to predict industrial development in Africa. The results provide the first evidence on how machine learning techniques and nightlight data can be used to predict economic development in places where subnational data are missing or not precise. Taken together, the research confirms four groups of important determinants of industrial growth: natural resources, agriculture growth, institutions, and manufacturing imports. Our findings indicate that Africa should follow a more multisector approach for development, putting natural resources and agriculture productivity growth at the forefront.
    Keywords: Industrial growth; Machine learning; Africa
    JEL: I32 O15 O40 O55
    Date: 2019–01
  6. By: Seven, Unal (Central Bank of the Republic of Turkey); Tumen, Semih (TED University)
    Abstract: We present cross-country evidence suggesting that agricultural credits have a positive impact on agricultural productivity. In particular, we find that doubling agricultural credits generates around 4-5 percent increase in agricultural productivity. We use two different agricultural production measures: (i) the agricultural component of GDP and (ii) agricultural labor productivity. Employing a combination of panel-data and instrumental- variable methods, we show that agricultural credits operate mostly on the agricultural component of GDP in developing countries and agricultural labor productivity in developed countries. This suggests that the nature of the relationship between agricultural finance and agricultural output changes along the development path. We conjecture that development of the agricultural finance system generates entry into the agricultural labor market, which pushes up the agricultural component of GDP and keeps down agricultural labor productivity in developing countries; while, in developed countries, it leads to labor-augmenting increase in agricultural production. We argue that replacement of the informal credit channel with formal and advanced agricultural credit markets along the development path is the main force driving the labor market response.
    Keywords: agricultural credits, productivity, labor markets, financial development
    JEL: J43 Q14 Q18 O47
    Date: 2020–01
  7. By: Udi Joshua (Federal University Lokoja, Kogi state, Nigeria); Festus V. Bekun (Istanbul Gelisim University, Istanbul, Turkey); Samuel A. Sarkodie (Nord University Business School, Norway)
    Abstract: This study examines the relationship between foreign direct investment inflows and economic growth by incorporating the role of urbanization, coal consumption and CO2 emissions as additional variables to avoid omitted variable bias. The different order of integration from the unit root test suggested the adoption of a dynamic autoregressive distributed lag bounds testing procedure. The results confirmed the existence of a long-run equilibrium relationship between the outlined series within the period under investigation with a high speed of convergence. The ARDL equilibrium relationship shows that coal consumption is the largest emitter of carbon dioxide emissions in both short- (0.77%) and long- (0.86%) run. Economic growth was found to escalate CO2 emission by approximately 0.27% (in the short-run) and 0.19% (in the long-run). The Granger causality test indicates a non-causal effect between FDI inflow and economic expansion in South Africa, which implies that FDI is not a driver of economic advancement. The empirical study shows a bidirectional causal effect between urbanization and foreign direct investment. This suggests that urban development stimulates foreign direct investment in South Africa. The findings reveal a one-way link from GDP to coal consumption, suggesting economic prosperity promotes coal consumption. The study underscores that economic development and the attraction of more economic investments is in part, dependent on the conservative policy, development of urban centres through infrastructural improvement, and establishing industrial zones.
    Keywords: South Africa; coal consumption; CO2 emissions; climate change; urbanization
    Date: 2020–01
  8. By: Mohamed Gritli (Faculté des Sciences Economiques et de Gestion de Tunis - UTM - Université Tunis El Manar, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Serge Rey (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: Much research has focused on the relationship between financial development and growth, on the one hand, and the relationship between financial integration and economic development, on the other. However, the link between capital account liberalization and financial development remains limited, particularly for the Middle East and North African countries. The purpose of this article is to propose an empirical analysis of this relationship in the case of Tunisia, a country that has chosen for several decades to gradually open up to foreign capital. The econometric study carried out over the period 1986-2014 using a Toda-Yamamoto long-term causality model in conjunction with an ARDL model showed that the capital account openness did indeed have a positive effect on long-term financial development. This result is robust to several specifications of the autoregressive model and to alternative measures of financial development. Nevertheless, the short-term impact of the capital account openness is more limited, especially when considering the effects on the stock market.
    Abstract: De nombreuses recherches se sont focalisées sur la relation entre le développement financier et la croissance, d'une part, et sur la relation entre l'intégration financière et le développement économique, d'autre part. Cependant, l'étude du lien entre libéralisation du compte capital et développement financier reste encore limitée, et en particulier pour les pays du Moyen Orient et d'Afrique du Nord. L'objet de cet article est de proposer une analyse empirique de cette relation dans le cas de la Tunisie, pays qui a fait le choix depuis plusieurs décennies de s'ouvrir progressivement aux capitaux étrangers. L'étude économétrique menée sur la période 1986-2014 en utilisant conjointement un modèle de causalité de long terme Toda-Yamamoto et un modèle ARDL a permis de montrer que l'ouverture du compte capital avait bien un effet positif sur le développement financier en longue période. Ce résultat est robuste à plusieurs spécifications du modèle autorégressif et à des mesures alternatives du développement financier. Néanmoins, l'impact de court terme de l'ouverture du compte capital est plus limité, en particulier lorsqu'on considère les effets sur le marché boursier.
    Keywords: Tunisia,ARDL,causality,financial development,capital account,causalité,modèle ARDL,Tunisie,développement financier,compte capital
    Date: 2020
  9. By: Ibrahim D. Raheem (Liège, Belgium); Sara le Roux (Oxford, UK.); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study examines the asymmetry between capital flows and economic growth in 42 countries for the period 1990-2017. It further argues that uncertainty is an important channel through which asymmetry operates. As such, the three measures of uncertainty are macroeconomic, fiscal and institutional. The Generalised Method of Moments is used as an empirical strategy. The existence of an asymmetry is confirmed by the findings as capital flows are more reactive to economic drag when compared to economic growth. Furthermore, the channels through which asymmetry operate are heterogeneous to measures of capital flows and proxies for uncertainty.
    Keywords: Capital flows, Economic growth, Asymmetry, Uncertainty and Emerging countries
    JEL: C13 F3 G15 O16
    Date: 2019–08
  10. By: Calderon,Cesar; Chuhan-Pole,Punam; Kubota,Megumi
    Abstract: This paper discusses recent trends and investigates the drivers of capital flows across regions in the world, with emphasis on Sub-Saharan Africa. The post-global financial crisis behavior of capital flows into Sub-Saharan Africa is unique and differs from that of global capital flows. The structure of financial flows into Sub-Saharan Africa has shifted toward new sources, such as international bond issuances and debt inflows from non?Paris Club governments. The main message is that the behavior of capital flows into Sub-Saharan Africa differs from that of capital flows into global, industrial, and non?Sub-Saharan African developing countries. The regression analysis reveals that gross flows into Sub-Saharan African are predominantly influenced by external factors, such as foreign growth and uncertainty in global markets and policies. Capital flow behavior for Sub-Saharan African countries is different from that of industrial countries due to different economic structures, which render different transmission processes. The main findings suggest that pull and push factors are the driving forces of capital inflows for industrial countries and non?Sub-Saharan African developing countries?especially better economic performance, sound fiscal outcomes, a greater degree of financial openness, and stronger institutions. The impact of these drivers has become stronger in the 2000s. Macroeconomic policy can play an important role in attracting capital inflows. For instance, fiscal discipline promotes greater other investment inflows, and less flexible exchange rate arrangements (more exchange rate stability) foster portfolio investment inflows.
    Date: 2019–03–12
  11. By: Ha, Jongrim (World Bank); Kose, M. Ayhan (International Monetary Fund); Otrok, Christopher (University of Virginia); Prasad, Eswar (Cornell University)
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models
    JEL: E32 F4 C32 C1
    Date: 2020–02
  12. By: Broccolini,Chiara; Lotti,Giulia; Maffioli,Alessandro; Presbitero,Andrea F.; Stucchi,Rodolfo Mario
    Abstract: This study uses loan-level data on syndicated lending to a large sample of developing countries between 1993 and 2017 to estimate the mobilization effects of multilateral development banks (MDBs), that is, their ability to crowd-in capital from private creditors. Controlling for a large set of fixed effects, the paper shows evidence of positive and significant mobilization effects of multilateral lending on the size of bank inflows. The number of lenders and the average maturity of syndicated loans also increase. These effects are present not only on impact but last for up to three years and are not offset by a decline in bond financing. There is no evidence of anticipation effects, and the results are robust to numerous tests controlling for the role of confounding factors and unobserved heterogeneity. Finally, the results are economically sizable, indicating that MDBs can mobilize about seven dollars in bank credit over a three-year period for each dollar invested.
    Date: 2020–02–25
  13. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: Purpose –This study investigates the role of financial access in moderating the effect of governance on insurance consumption in 42 Sub-Saharan African countries using data for the period 2004-2014. Design/methodology/approach – Two life insurance indicators are used, notably: life insurance and non-life insurance. Six governance measurements are also used, namely: political stability, “voice & accountability†, government effectiveness, regulation quality, corruption-control and the rule of law. The empirical evidence is based on the Generalised Method of Moments (GMM) and Least Squares Dummy Variable Corrected (LSDVC) estimators. Findings –Estimations from the LSDVC are not significant while the following main findings are established from the GMM. First, financial access promotes life insurance through channels of political stability, “voice & accountability†, government effectiveness, the rule of law and corruption-control. Second, financial access also stimulates non-life insurance via governance mechanisms of political stability, “voice & accountability†, government effectiveness, regulation quality, the rule of law and corruption-control. Originality/value – This research complements the sparse literature on insurance promotion in Africa by engaging the hitherto unexplored role of financial access through governance channels.
    Keywords: Insurance; Finance; Governance; Sub-Saharan Africa
    JEL: I28 I30 G20 O16 O55
    Date: 2019–01
  14. By: Demirguc-Kunt,Asli; Hu,Bingjie; Klapper,Leora
    Abstract: Financial inclusion can help promote development. Inclusive financial systems allow people to invest in their education and health, save for retirement, capitalize on business opportunities, and confront shocks. In the Europe and Central Asia region, there is great variation in financial inclusion. In the euro area, most adults already own an account. Account ownership -- which is the first step of entry into the formal financial system has increased in the developing countries in the region, to 65 percent of the adult population from 45 percent in 2011. Tajikistan, Armenia, Moldova, the Kyrgyz Republic, and Georgia are among the countries that have seen the greatest increases globally, despite starting from a very low base. These experiences underline the potential role of digital payments in driving financial inclusion. Nevertheless, almost 30 percent of unbanked adults report lack of trust in banks as a barrier, which is nearly double the developing country average. And in some countries, gender and income gaps in account ownership remain significant. For example, the gender gap is close to 30 percentage points in Turkey, which is three times the average gap in developing countries. And in Romania, the gap between richest 60 percent of the population and poorest 40 percent is 33 percentage points, which is more than twice the average gap in developing countries. But there are many opportunities to increase account ownership. Over 80 percent of the unbanked have a mobile phone, and simply moving public sector pension payments into accounts would reduce the number of unbanked adults in the region by up to 20 million, including 8 million in the Russian Federation alone. Given the heterogeneity of experiences, there are ample opportunities for countries in the region to learn from each other, which lays out a rich research and operational agenda going forward.
    Keywords: Financial Sector Policy,Telecommunications Infrastructure,ICT Economics,Inequality,Educational Sciences
    Date: 2019–04–24
  15. By: Abraham,Facundo; Cortina Lorente,Juan Jose; Schmukler,Sergio L.
    Abstract: During the past decades, firms from emerging economies have significantly increased the amount of financing obtained in capital markets. Whereas the literature argues that international markets have been an important contributor to this process, the role of domestic markets is mostly unknown. By examining the case of East Asia, this paper shows that domestic markets have been a key driver of the observed trends in capital market financing since the early 2000s. As domestic markets developed, more and smaller firms gained access to equity and corporate bond financing. Domestic markets also helped some corporations to diversify funding sources and obtain domestic currency financing. Policy reforms following the Asian Financial Crisis accompanied the growth of domestic markets. Part of the reforms were aimed at developing domestic capital markets for small and medium-size enterprises. Although these markets have developed significantly, they still serve relatively few corporations, albeit from new sectors.
    Date: 2019–05–07
  16. By: Bakhtiari, Sasan (Department of Industry, Innovation and Science Australia); Breunig, Robert (Australian National University); Magnani, Lisa (Macquarie University, Sydney); Zhang, Jacquelyn (Australian National University)
    Abstract: We review the literature on financial constraints and the performance of small and medium enterprises (SMEs). We consider the important role that SMEs play in the economies of Australia and the Organisation for Economic Cooperation and Development. We examine the role of financial constraints in SME growth, with emphasis on business cycles and credit access. We discuss issues that SMEs face in accessing financial resources for expansion. We look at the literature that evaluates the impact of financial constraints on key outcomes: employment, productivity and wages. We review key policy debates and consider where government involvement might be appropriate.
    Keywords: small and medium enterprises (SME), firm financial constraints, government business assistance, employment, wages, productivity, innovation
    JEL: D22 L25
    Date: 2020–01
  17. By: Florian Leon (FERDI - Fondation pour les Etudes et Recherches sur le Développement International); Samuel Monteiro (I&P - Investisseurs et Partenaires)
    Abstract: This paper investigates the validity of Gibrat's law in sub-Saharan Africa using data from 22,495 firms operating in 45 African countries. Results indicate that Gibrat's law does not hold in Africa, i.e. small firms create more jobs than their larger counterparts do. We point out that the usual explanations (such as diminishing returns, the learning process, and the minimum efficient size) do not explain this finding. We present a new explanation based on firm access to capital. According to our hypothesis, employment growth among small firms in Africa is faster because small firms adopt labor-intensive and capital-saving technology to expand their business activities. SMEs have a lower capital-labor factor because in order to grow, they tend to overuse labor and underuse capital due to financial constraints., hence their greater job growth momentum. Different econometric tests provide support to our hypothesis. Specifically, we prove that the negative relationship between firm size and growth is mitigated for firms with access to credit.
    Keywords: Firm growth,Job creation,Gibrat's law,Africa,Financial constraint
    Date: 2019–12–28
  18. By: Rappoport, Veronica; Federico, Stefano; Hassan, Fadi
    Abstract: The effect of trade liberalization on welfare and economic activity remains one of the most important questions in economics. The literature identifies a number of key determinants that reduce the potential gains from trade, by focusing on frictions to labor mobility across regions or sectors. This paper contributes to this debate by exploring a novel channel, namely the reallocation of credit in the aftermath of a trade shock. We find that there are endogenous financial frictions that arise from trade liberalization and spillovers between losers and winners from trade that go through banks, as banks can be negatively affected by a trade shock through the portfolio of firms they lend to. Using data from the Italian credit registry, matched with bank and firm level data, we follow the evolution of bank and firm activities prior to and after the entry of China into the WTO. We identify the sectors most affected by import competition from China and estimate the transmission of this trade shock from firms to their lending banks, and the consequence of the shock on banks' lending to other firms. We find that, controlling for credit demand, banks exposed to the China shock decrease their lending relative to non-exposed banks. Importantly, this lending is reduced both for firms exposed to competition from China and to those that are not and that we should expect to expand. The main mechanism is related to the reduction of the core capital of banks, and their resulting funding capacity, through the rise of non-performing loans. We quantify the impact of this effect on real outcomes such as employment, investment, and output and we find relevant aggregate implications. These findings provide evidence that following a trade shock, bank lending has a key impact on the reallocation channel and on the potential gains from trade.
    Keywords: trade liberalisation; China shock; bank credit; resource reallocation; gains from trade
    JEL: F10 F14 G21
    Date: 2019–09
  19. By: Costa-Font, Joan (London School of Economics); Giuliano, Paola (University of California, Los Angeles); Ozcan, Berkay (London School of Economics)
    Abstract: Traditional economic interpretations have not been successful in explaining differences in saving rates across countries. One hypothesis is that savings respond to cultural specific social norms. A seminal paper in economics (1) however did not find any effect of culture on savings. We revisit this evidence using a novel dataset, which allows us to study the saving behavior of up to three generations of immigrants in the United Kingdom. Against the backdrop of existing evidence, we find that cultural preferences are an important explanation for cross-country differences in saving behavior, and their relevance persists up to three generations.
    Keywords: saving, culture
    JEL: Z1 D0
    Date: 2020–02

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