This document summarizes a study on the relationship between financial development and economic growth in emerging market economies. The study uses empirical analysis through fixed effects regression models to examine how various financial development indicators, such as private credit levels, banking system assets, liquid liabilities, and stock market capitalization, impact per capita GDP growth in 27 emerging markets from 1960 to 2011. The results suggest that financial development can promote economic growth through indirect benefits, and several financial indicators were found to have a significant positive relationship with economic growth in the countries studied, including India. However, policies are needed to manage risks from financial openness and ensure credit quality.

1. Financial Development and Growth:
An Empirical Analysis on Emerging Market
Economies
Financial development has a potential to engineer the growth, with its indirect collateral benefits.
Sarthak Luthra
October 20, 2015
Source: Haver Analy;cs, Ci; Research

2. Table of Contents
• Background and Introduction
• Literature Review
• Methodology
• Scope
• Conclusion and Policy Implications*

3. Growth effects through financial developments have been studied via
indirect channels such as capital accumulation and productivity growth;
1980s and 1990s witnessed a phase of financial liberalization and financial
development, which is broadly regarded as a means to engender
competition and growth
However,
Financial development and integration increases the probability of crisis,
by making an economy more vulnerable to capital shocks
• Micro level lending becomes more risky
• Macro level, banking becomes more risky due to greater fluctuations in
the interests rates and exchange rate
Background and Introduction
Appropriately, this paper attempts to discuss growth affects of financial
development in emerging market economies and provide a perspective for India.
Policy Relevance:
• Financial policies in terms of financial development and financial integration
• Domestic financial policies and its impact on growth
• Policy towards reducing vulnerability to external and internal shocks

4. • Financial development and growth relation experiencing a trade-off between
empirical evidence and theoretical prediction
• Conventional growth theory highlights the importance of capital accumulation
as a driving force behind output per worker and per capita GDP
• The indefiniteness via positive and negative effects of finance on growth seems
to depend on the spatial and time dimension of the investigation, measurement
methods related to financial indicators, and econometric strategy
• Growing significance of thresholds of financial depth and institutional
establishment
• The relation between financial development and its growth effects has been
widely researched in the past literature. However, there is a dearth in appropriate
quantification of growth impulses that are generated by financial development.
The research reviews an extensive literature of financial development and growth
and provides a framework on the depth and structure of financial developments in
the emerging market economies.
Literature Review

5. Majority of the EMEs experienced the uptake in financial development post 1990 era,
with ease of capital controls, deregulation, increased foreign direct investments,
remittances, and opening of the equity markets.
The study covers 27 EMEs from The World Bank Global Financial Development
Database (1960-2011)
The research also encompasses World Economic Outlook database by International
Monetary Fund (IMF). The database captures macroeconomic indicators with analysis
and projections will 2020
Using an empirical approach (Fixed effects Regression analysis)
This research captures the effect of financial development indicators in EMEs:
• Private credit by deposit money banks to GDP (%)
• Deposit money bank assets to deposit money bank assets and central bank assets
(%)
• Liquid liabilities to GDP (%)
• Stock market capitalization to GDP (%)
• Bank credit to bank deposits (%)
• Remittance inflows to GDP (%) on Per Capita GDP
Methodology

6. • Reviewing the link between financial development, financial
liberalization and growth;
• Empirically analyze the relationship between growth and
financial development in EMEs and India respectively;
• Discuss the merits and demerits of financial sector openness,
along with risks and opportunities associated with financial
development;
• Financial globalization and development, and its relation with
the economic growth can be better analysed by studying
indirect collateral benefits that feeds through institutional
quality, credit/GDP ratio, trade openness, stock market
turnover, and macro economic policy.
Scope

7. • Financial development feeds into economic growth through
indirect collateral benefits.
• The financial indicators studied are significant towards
economic growth
• India’s per capita GDP has been in positive direction with
liquid liabilities, domestic money banks’ asset to GDP,
domestic credit to private sector, stock market capitalization,
and bank credit to deposit ratio
• Given the level of financial development, robust financial
institutions play an important role in mitigating external shocks
• It has also been observed that a few EME, are witnessing
reversal in financial opening, which may not be a healthy sign
for the sector. Appropriately, policies pertaining to capital
controls will help mitigating financial distortions.
• The objective of policy should no longer be primarily to raise
total depth of credit to GDP, but the focus instead should be
on ensuring that the credit is of high quality in the sense that it
is directed to the highest-return activities.
Outcomes

8. References
• Financial Liberalization: What Went Right, What Went Wrong,
The World Bank, 2005
• Financial Sector And Growth In Emerging Asian Economies,
Asian Development Bank, William R. Cline, 2015
• Stock Market Development And Economic Growth In India:
An Empirical Analysis, P. Srinivasan, 2014
• Thresholds In The Process Of International Financial
Integration, M. Ayhan Kose, Eswar S. Prasad, Ashley D. Taylor,
2009
• Financial Globalization: A Reappraisal, M. Ayhan Kose, Eswar
Prasad, Kenneth Rogoff, And Shang-jin Wei︎, 2009
• IMF Global Financial Development Report, The World Bank,
2014
• The Role Of Financial Institutions And The Economic Growth: A
Literature Review, European Journal Of Business And
Management, Muhammad Saqib Khan, 2015

9. Thank You