Financial Development and Economic Growth in Vietnam

By Anwar, Sajid; Nguyen, Lan Phi | Journal of Economics and Finance, July 2011 | Go to article overview
Save to active project

Financial Development and Economic Growth in Vietnam

Anwar, Sajid, Nguyen, Lan Phi, Journal of Economics and Finance


By making use of a panel dataset that covers 61 provinces of Vietnam over the period 1997 to 2006, this paper examines the link between financial development and economic growth. Our analysis, which is based on endogenous growth theory, reveals that financial development has contributed to economic growth in Vietnam. We find that high ratio of credit to Gross Provincial Product (GPP) has accelerated economic growth in Vietnam. We also found a strong positive link between financial development and economic growth when alternative measures of financial development were used. The impact of foreign direct investment on economic growth will be stronger if more resources are invested in financial market development.

Keywords Financial Development * Economic Growth * Globalization * Vietnam

JEL Classification F20 * 011 * 016

1 Introduction

Financial development has contributed to impressive economic growth in a number of developing countries. In addition, it has been suggested that countries which are relatively more financially developed are better able to avoid or wimstand currency crises (Federici and Carioli 2009). Therefore, enhancing the financial development of countries with developing economies may have important positive consequences for the many organisations and individuals within such countries that are affected by economic downturns. These issues are particularly salient given the recent global financial crisis.

Generally speaking, financial development not only increases the supply of capital but, given the appropriate host-country policies, it can also facilitate technological innovation. Technological innovation contributes to human capital formation which can further enhance prospects of economic growth (in fact, it can be argued that a bi-directional causality exists between technological innovation and human capital formation). In other words, financial development can facilitate economic growth through direct as well as indirect channels.1

Endogenous growth literature [for example the work of Romer (1986), Lucas (1988, 1993)] highlights the role of financial development for long-run economic growth in developing countries. This literature suggests that financial development enhances economic growth through the impact of financial sector services on capital accumulation and technological innovation. These services include mobilization of savings, acquiring information about investments and allocation of resources, monitoring of managers and exerting corporate control and facilitation of risk reduction (Roubini and Sala-i-Martin 1992; King and Levine 1993).

On the other hand, theories of financial structure (which include the bank-based, the market-based, the financial services based and the law and finance based theories) provide alternative tools to analyse the relationship between financial structure and economic growth. For example, the bank-based theory emphasizes the positive role of commercial banks in economic development. It argues that banks can finance economic development effectively in the early stages of economic development because these banks that are unhampered by regulatory restrictions, can exploit economies of scale and scope in information gathering and processing. They can also be efficient in mobilizing resources and managing risks (Levine 2002; Beck and Levine 2004). In contrast, the market-based theory highlights the advantages of well-functioning markets in promoting successful economic performance. According to this theory, big, liquid and well-functioning markets foster growth and profit incentives, enhance corporate governance, facilitate risk management and diversification as well as customization of risk management devices (Levine 2002). The financial-services theory that is based on both the bank-based and the market-based views stresses the importance of the key financial services provided by financial systems.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Financial Development and Economic Growth in Vietnam


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?