Academic journal article East Asian Economic Review

Financial Accessibility and Economic Growth

Academic journal article East Asian Economic Review

Financial Accessibility and Economic Growth

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

Conventional economic theories suggest that financial development is a vital factor in economic growth. Simply put, financial development can provide financial institutions with more savings and, consequently, provide more financial resources to firms, eventually promoting private investment. At the same time, it can stimulate private consumption through the consumption smoothing process or financial risk diversification.

For these reasons, improving financial accessibility or increasing financial inclusion has recently become a subject of considerable interest among policy makers, researchers, and other stakeholders.1,2 Higher accessibility to financial services means that either savers or borrowers can approach financial institutions more easily or use financial services in a more extensive manner than they could under low accessibility conditions. Particularly, in developing countries with very limited financial accessibility, if more people can gain easier access to financial institutions and make greater use of financial services, then their economic activities can increase. Hence, many governments and international development organizations, such as the World Bank, have tried to improve accessibility to financial services in developing countries for years.3

Despite these important arguments, improved financial accessibility might not lead to real-world economic growth. If these financial institutions are not properly managed or are poorly designed, especially in developing countries, then it might worsen the economy's performance. It is well known that considerable costs can occur when opening new branches of a financial institution or providing new financial services to the public. Furthermore, history has shown that excessive competition in the financial market or an over-supply of financial services may cause banks' performance to deteriorate and sometimes lead to a banking crisis. Improving financial accessibility is also an issue. Recently, electronic banking and financial activities have become so popular in some high-income countries that financial services can occur without clients physically contacting the offices of financial institutions. Clients can perform major banking services, such as money transfers or payments, with a simple touch of the screen on a mobile device or the use of their plastic cards. Thus, it is questionable if installing more bank branches will lead to growth in financial services and greater economic growth.

Very few researchers have provided evidence to test the hypotheses of these theoretical arguments and practical issues; few have empirically investigated the relationship between financial accessibility and economic growth. In particular, no rigorous study with comprehensive data comparing various countries has appeared in the literature. This is mainly due to cross-country data representing financial access that have become available only very recently. In addition, until recently, researchers have not sufficiently emphasized the importance of financial access to promote economic growth. Providing infrastructure, such as highway or railway, has usually taken a higher priority among development agendas.

In this paper, we attempt to fill this gap. We have econometrically examined the relationship between financial access and economic growth. To that end, we have built a simple econometric model for estimation, applying a panel of 165 countries' unbalanced data collected from 2004 to 2011. In addition, we have applied this model to test the impact of financial access on economic growth in countries at different stages of development. And we have considered three development groups in this investigation: low-income countries (LICs), middle-income countries (MICs), and high-income countries (HICs).

This paper has four sections. The first section is an introduction, and the second provides the theoretical background and literature review on this topic. …

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