Financial Development, Commercial Development, and Economic Growth in the Selected Emerging and the Middle Eastern Countries

International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2017, 7(3), 362-370. Financial Development, Commercial Development, and Economic Growth in the Selected Emerging and the Middle Eastern Countries#1 Lotfali Agheli1*, Golnaz Hadian2 Faculty Member, Economic Research Institute, Tarbiat Modares University, Iran, 2MA in Economics, Tarbiat Modares University, Iran. *Email: 1 ABSTRACT This study investigates panel causality relationships among financial development (FD), commercial development and economic growth using bootstrap method in selected emerging and developing countries during 1980-2013. In this study, simultaneous equations, seemingly unrelated regression, Wald test and bootstrap critical tests are used to determine causality relationship among variables under study. Our findings indicate the difference of causality across countries and among different variables, so that in some countries, FD has led to economic growth and in other countries, this has not happened because of lack of deep financial sector. However, in most countries, commercial development has led to improvement of economic growth. Moreover, the results imply difference in direction of causality from economic growth to both financial and commercial development. Keywords: Oil-dependent Countries, Emerging Markets, Panel Causality JEL Classifications: C23, G32, P45 # This paper has been extracted from MA thesis of my student. 1. INTRODUCTION Economists often consider the relationships among financial policies, commercial development and economic growth. In viewpoints of capitalists, a completely free economy is preferred to a highly regulated economy. Empirical evidences from trade openness demonstrate positive effect of open-door policy on economic growth. In this regard, reduction of trade restrictions, prudent macroeconomic policies, government policies and political stability play crucial roles in explanation of the correlation between economic growth and trade openness of an economy. Positive correlation between trade openness and economic growth has caused appropriate motivation for the unilateral trade reforms over the past 20 years, so that about 100 countries around the world are committed to commercial development (McKinnon, 1973; Khataie and Seifipour, 2000). Existence of a positive correlation between open trade and economic growth is an important factor to encourage trade 362 reforms in many countries. Logical basis for implementation of trade reforms is this belief that liberalization is the prerequisite for transferring to a relatively open economy. On the other hand, financial development (FD) can pave the way for economic growth through increasing saving and investment level and its impact on optimal resource allocation and capital efficiency. Commercial development and FD can reduce inefficiencies in production process, and empower economic growth, since due to empirical evidences, countries with more openness degree and more developed financial markets have experienced accelerating economic growth (Barro, 1991; Nazifi, 2004). In simple approach to financial markets, only the losses and gains resulting from fluctuations of financial assets’ prices are considered; although an efficient financial sector can lead to economic growth. In this field, economists like Schumpeter (1911) and Hicks (1969) argued that FD is inseparable component of economic growth process. In fact, optimal performance of economic system in every society is dependent on existence of International Journal of Economics and Financial Issues | Vol 7 • Issue 3 • 2017 Agheli and Hadian: Financial Development, Commercial Development, and Economic Growth in the Selected Emerging and the Middle Eastern Countries two efficient financial and real sectors. The interaction of these two sectors is the necessary and sufficient condition for success of economic system, since performance of each sector can affect the performance of the other one. The main purpose of this study is to find causality direction among variables of FD, economic growth and commercial development among oil countries of the Middle East and emerging economics during 1980-2013. In this regard, bootstrap approach is used in the context of panel causality. The main research questions are as follows: 1. Do financial institutions influence economic growth? Does economic growth lead to FD in the countries? 2. What is the impact of commercial development on economic growth? 3. What is the impact of financial growth on commercial development? The rest of this paper is organized in 4 sections. Section 2 devotes to theoretical basics. Section 3 presents the empirical background on the relationships among FD, economic growth and commercial development. Section 4 introduces the sample, data and variables. Section 5 indicates econometric issues. Finally, Section 6 concludes. 2. THEORETICAL BASICS The theoretical issues for this research are presented in three following subsections. 2.1. Impact of FD on Economic Growth In general, there are two patterns on the relationship between FD and economic growth. The first pattern argues that FD has no effect on the economic growth (Solow, 1962; Stern, 1989). Singh (1997) believed that FD is not useful for economic growth due to following reasons: • In developing countries, the intrinsic instability and volatility in stock market prices cannot reflect the efficient allocation of financial assets. • Due to interdependence of money and stock markets, the undesired economic shocks may result in macroeconomic instability and slowness of economic growth. • The banking system in some developing countries, especially in the South East Asian countries, may be weakened because of expansion of stock markets. It seems Singh considers financial sector as a main rival for banking system. • The second pattern emphasizes the relationship between FD and economic growth. This is developed in three following approaches. 2.1.1. Supply-side approach This approach assumes one-directional causality running from FD to economic growth. FD can boost economic growth in different ways. For instance, FD can help to trade-off financial sources among corporates having different portfolios. This trade-off likely increases the financial depth, and encourages the investments, which finally leads to economic growth. The neo classical economists, who focus on governance of prices and liberalization of interest rates, follow this approach. In this context, McKinnon (1991), Shaw (1973), and Goldsmith (1955) reject the monetary models of Keynesians and Structuralists based on control of financial markets, and believe that these models do not match conditions of developing countries. They argue that intervention of government in financial markets, which is reflected in controlling interest rate and regulating bank reserves, is a main (...truncated)