Academic journal article Journal of Economic Development

Inclusive Finance, Growth and Socio-Economic Development in Saudi Arabia: A Threshold Cointegration Approach

Academic journal article Journal of Economic Development

Inclusive Finance, Growth and Socio-Economic Development in Saudi Arabia: A Threshold Cointegration Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The relationship between financial development and economic growth has been examined extensively in the literature, but the effects of financial development and economic growth on socio-economic development is relatively scant. Since the start of the 20th century economists have highlighted the importance of financial development in the process of economic growth. Schumpeter (1911) supports that financial development leads economic growth, while Robinson (1952) argues that finance does not cause growth, but rather, it responds to demands from the real sector. Currently, there are several exiting views. According to the first view financial development is a "sine qua non" condition to economic growth and to a global socio-economic development (the supply-leading response). Cameron (1967), Goldsmith (1969), McKinnon and Chaw (1973) were the first to highlight the importance of liberalized financial system. They postulated that government intervention in the financial system of a country, which they termed "financial repression", inhibits growth by depressing real interest rates. Later, many studies argue that financial deepening is vital to economic growth since it increases savings and facilitates capital accumulation leading to greater investment. Recent empirical works find positive causal relationship between economic growth financial development and identify two distinct channels, the accumulative channel which emphasizes the finance-induced positive effects of physical and human capital accumulation (Pagano, 1993; De Gregorio and Kim, 2000) and the allocative channel which focuses on the rising efficiency of resource allocation which is caused by financial deepening and which subsequently enhances growth (King and Levine, 1993; Chistopoulos and Tsionas, 2004).

The second view maintains that it is economic growth that drives the development of the financial sector (Rajan and Zingales, 1998; Ang and Mckibbin, 2007) (the demand-following response). As economy grows, it generates demand for financial services, so the lack of financial institutions in developing countries is due to the lack of the demand to their services. Growth creates opportunities and increases the return on investment, stimulating demand for credit. Concurrently, growth increases wealth and the pool of savings that could be available for credit supply, provided that a sophisticated financial system is in place to intermediate between savers and borrowers (Ben Naceur et al., 2014).

The third view contends that both financial development and economic growth Granger-cause each other, i.e. that there is a bi-directional causality between financial development and economic growth. Patrick (1966) was the first to posit that financial deepening as an outcome of economic growth, which in turn feeds back as a factor of real growth. Works by Greenwood and Jovanovic (1990), Greenwood and Bruce (1997) and Berthelemy and Varoudakis (1997) among others support this view. In this line, Abu-Bader and Abu-Qarn (2008), using data from Egypt, concluded that there exist a bi-directional causality between financial development and economic growth and that financial development causes economic growth through increasing resources for investment and enhancing efficiency.1

In recent years, the paradigm of financial inclusion emerged and economists try to understand the microeconomic relations between financial development, economic growth and other socio-economic variables like poverty, unemployment and exclusion. Inclusive finance; safe savings, appropriately designed loans for poor and low-income households and for micro, small and medium-sized enterprises, and appropriate insurance and payments services; can help people help themselves to increase incomes, acquire capital, manage risk and work their way out of poverty. The central question asked in this field is how to bring access to these fundamental services to all people in developing countries and thus accelerate their economic development and that of their countries. …

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