Skip to main content

Advertisement

SpringerLink
Log in

Revisiting the link between financial development and industrialization: evidence from low and middle income countries

  • Research Article
  • Published:
Annals of Finance Aims and scope Submit manuscript

Abstract

The paper uses a dynamic panel model to analyze the relationship between financial development and industrialization in the context of low and middle income countries between 1970 and 2014. The results indicate that the relationship between the two is non-linear. More precisely, the results indicate that financial development has a negative effect on industrial development up to a point, after which the effect turns positive. This evidence of a “U-shaped” relationship emphasizes the centrality of financial development in the industrialization process in developing economies, but it also points to the complex nature of the relationship.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Availability of data and material

We use publicly available data from the World Bank Database (https://data.worldbank.org/).

Code availability

Codes will be provided upon request.

Notes

  1. World Bank Database.

  2. See for example, Levine (1997)and Arcand et al. (2015)

  3. Rousseau and Wachtel (2000)

  4. World Bank Database.

  5. World Bank database.

  6. World Bank Database.

  7. World Bank Database.

  8. Development banks remain very important even today. The costs and benefits of development banking on technological progress in a context of moral hazard and weak institutions has been emphasized by Hoedlin (2020).

References

  • Adjasi, C.K.D., Biekpe, N.B.: Stock market development and economic growth: the case of selected African countries. Afr Dev Rev 18(1), 144–161 (2006)

    Google Scholar 

  • Aggarwal, A., Kumar, N.: Structural change, industrialization, and poverty reduction. In: Naudé, W., Szirmai, A., Haraguchi, N. (eds.) Structural Change and Industrial Development in the BRICS. Oxford: Oxford University Press (2015)

    Google Scholar 

  • Aghion, P., Bergeaud, A., Cette, G., Lecat, R., Maghin, H.: Coase lecture—the inverted-U relationship between credit access and productivity growth. Economica 86(341), 1–31 (2019)

    Google Scholar 

  • Amsden, A.H.: The Rise of “The Rest”: Challenges to the West from Late-Industrializing Economies. Oxford: Oxford University Press (2001)

    Google Scholar 

  • Arcand, J.L., Berkes, E., Panizza, U.: Too much finance? J Econ Growth 20(2), 105–148 (2015)

    Google Scholar 

  • Arellano, M., Bover, O.: Another look at the instrumental variable estimation of error-components models. J Econom 68(1), 29–51 (1995)

    Google Scholar 

  • Argitis, G.: Thorstein Veblen’s financial macroeconomics. J Econ Issues 50(3), 834–850 (2016)

    Google Scholar 

  • Baer, W.: Import substitution and industrialization in Latin America: experiences and interpretations. Lat Am Res Rev 7(1), 95–122 (1972)

    Google Scholar 

  • Balassa, B.: The process of industrial development and alternative development strategies. World Bank staff working paper no. SWP 438. World Bank (1980)

  • Baltagi, B.: Econometric Analysis of Panel Data. New York: Wiley (2008)

    Google Scholar 

  • Ban, C.: Brazil’s liberal neo-developmentalism: new paradigm or edited orthodoxy? Rev Int Polit Econ 20(2), 298–331 (2013)

    Google Scholar 

  • Beck, T., Levine, R.: Stock markets, banks, and growth: panel evidence. J Bank Finance 28(3), 423–442 (2004)

    Google Scholar 

  • Blundell, R., Bond, S.: Initial conditions and moment restrictions in dynamic panel data models. J Econom 87(1), 115–143 (1998)

    Google Scholar 

  • Caballero, R.J., Krishnamurthy, A.: Bubbles and capital flow volatility: causes and risk management. J Mon Econ 53(1), 35–53 (2006)

    Google Scholar 

  • Cameron, R.: Banking in the early stages of industrialization a preliminary survey, Scandinavian. Econ Hist Rev 11(2), 117–134 (1963)

    Google Scholar 

  • Cameron, A.C., Trivedi, P.K.: Microeconometrics: Methods and Applications. Cambridge: Cambridge University Press (2005)

    Google Scholar 

  • Cecchetti, S., Kharroubi, E.: Reassessing the impact of finance on growth. BIS working paper 381. Basel: Bank for International Settlements (2012)

  • Cecchetti, S., Kharroubi, E.: Why does financial sector growth crowd out real economic growth? BIS working paper 490. Basel: Bank for International Settlements (2015)

  • Cetorelli, N., Strahan, P.E.: Finance as a barrier to entry: bank competition and industry structure in local US markets. J Finance 61(1), 437–461 (2006)

    Google Scholar 

  • Chandrasekhar, C.P.: Financial liberalization, fragility and the socialization of risk: can capital controls work? Soc Sci 33(3/4), 3–39 (2005)

    Google Scholar 

  • Chandrasekhar, C.P.: National development banks in a comparative perspective. In: Calcagno, A., Dullien, S., Marquez-Velasquez, A., Maystre, N., Priewe, J. (eds.) Rethinking Development Strategies After the Financial Crisis, Volume II-Country Studies and International Comparisons, 1st edn. New York: United Nations (2016)

    Google Scholar 

  • Chenery, H., Robinson, S., Syrquin, M.: Industrialization and Growth: A Comparative Study. New York: Oxford University Press (1986)

    Google Scholar 

  • Clark, D.P., Sawyer, C.W., Sprinkle, R.L.: Openness and industrialization in developing countries. Appl Econ Lett 6(3), 161–164 (1999)

    Google Scholar 

  • Cornehls, J.V.: Veblen’s theory of finance capitalism and contemporary corporate America. J Econ Issues 38(1), 29–58 (2004)

    Google Scholar 

  • Da Rin, M., Hellmann, T.: Banks as catalysts for industrialization. J Financ Intermed 11(4), 366–397 (2002)

    Google Scholar 

  • Davanzati, G.F., Pacella, A.: Thorstein Veblen on credit and economic crises. Camb J Econ 38(5), 1043–1061 (2014)

    Google Scholar 

  • Ductor, L., Grechyna, D.: Financial development, real sector, and economic growth. Int Rev Econ Finance 37, 393–405 (2015)

    Google Scholar 

  • Galindo, A., Schiantarelli, F., Weiss, A.: Does financial liberalization improve the allocation of investment? Micro-evidence from developing countries. J Dev Econ 83(2), 562–587 (2007)

    Google Scholar 

  • Galor, O., Moav, O.: From physical to human capital accumulation: inequality and the process of development. Rev Econ Stud 71(4), 1001–1026 (2004)

    Google Scholar 

  • Gantman, E.R., Dabós, M.P.: A Fragile link? A new empirical analysis of the relationship between financial development and economic growth. Oxf Dev Stud 40(4), 517–532 (2012)

    Google Scholar 

  • Gerschenkron, A.: Economic Backwardness in Historical Perspective. Harvard University Press, Cambridge (1962)

    Google Scholar 

  • Györy, C.: The institutional context of financial fraud in a post-transition economy: the Quaestor scandal. Eur J Criminol 17(1), 31–49 (2020)

    Google Scholar 

  • Haraguchi, N., Martorano, B., Sanfilippo, M.: What factors drive successful industrialization? Evidence and implications for developing countries. Struct Change Econ Dyn 49, 266–276 (2019)

    Google Scholar 

  • Heblich, S., Trew, A.: Banking and Industrialization. J Eur Econ Assoc 17(6), 1–44 (2018)

    Google Scholar 

  • Hodelin, R.S.: Development banking under weak institutions and imperfect credit markets. Ann Finance 16, 353–380 (2020)

    Google Scholar 

  • Jaremski, M.: National banking’s role in U.S. industrialization, 1850–1900. J Econ Hist 74(1), 109–140 (2014)

    Google Scholar 

  • Kaldor, N.: Causes of the Slow Rate of Economic Growth of the United Kingdom: An Inaugural Lecture. Cambridge: Cambridge University Press (1966)

    Google Scholar 

  • Kaminsky, G.L., Reinhart, C.M.: The twin crises: the causes of banking and balance-of-payments problems. Am Econ Rev 89(3), 473–500 (1999)

    Google Scholar 

  • King, R.G., Levine, R.: Finance and growth: Schumpeter might be right. Q J Econ 108(3), 713–737 (1993)

    Google Scholar 

  • Kohli, A.: State-Directed Development: Political Power and Industrialization in the Global Periphery. Cambridge: Cambridge University Press(2004)

    Google Scholar 

  • Kroszner, R.S., Laeven, L., Klingebiel, D.: Banking crises, financial dependence, and growth. J Financ Econ 84(1), 187–228 (2007)

    Google Scholar 

  • Law, S.H., Singh, N.: Does too much finance harm economic growth? J Bank Finance 41, 36–44 (2014)

    Google Scholar 

  • Levine, R.: Financial development and economic growth: views and agenda. J Econ Lit 35, 688–726 (1997)

    Google Scholar 

  • Levine, R.: Finance and growth: theory and evidence. In: Aghion, P., Durlauf, S. (eds.) Handbook of Economic Growth, Part A, Vol. 1. Amsterdam: Elsevier (2005)

    Google Scholar 

  • Levine, R., Loayza, N., Beck, T.: Financial intermediation and growth: causality and causes. J Mon Econ 46(1), 31–77 (2000)

    Google Scholar 

  • Lewis, W.A.: Economic development with unlimited supplies of labour. Manch Sch 22(2), 139–191 (1954)

    Google Scholar 

  • Lin, J., Chang, H.J.: Should Industrial Policy in developing countries conform to comparative advantage or defy it? A debate between Justin Lin and Ha-Joon Chang. Dev Policy Rev 27(5), 483–502 (2009)

    Google Scholar 

  • Lin, J.Y., Monga, C.: Beating the Odds: Jump-Starting Developing Countries. Princeton: Princeton University Press (2017)

    Google Scholar 

  • Lind, J.T., Mehlum, H.: With or without U? The appropriate test for a U-shaped relationship. Oxf B Econ Stat 72(1), 109–118 (2010)

    Google Scholar 

  • List, F.: The National System of Political Economy. New York: Cosimo Classics (1841 [2011])

  • Ljungberg, J., Nilsson, A.: Human capital and economic growth: Sweden 1870–2000. Cliometrica 3(1), 71–95 (2009)

    Google Scholar 

  • Manganelli, S., Popov, A.: Financial dependence, global growth opportunities, and growth revisited. Econ Lett 120(1), 123–125 (2013)

    Google Scholar 

  • Marconi, D., Upper, C.: Capital misallocation and financial development: a sector-level analysis. BIS working papers 671 (2017)

  • Maroof, Z., Hussain, S., Jawad, M.: Determinants of industrial development: a panel analysis of South Asian economies. Qual Quant 53, 1391–1419 (2018)

    Google Scholar 

  • McKinnon, R.I.: Money and Capital in Economic Development. The Brookings Institution, Washington (1973)

    Google Scholar 

  • Moore, T., Mirzaei, A.: The impact of the global financial crisis on industry growth. Manch Sch 84(2), 159–180 (2016)

    Google Scholar 

  • Murphy, K.M., Shleifer, A., Vishny, R.W.: Industrialization and the big push. J Pol Econ 97(5), 1003–1026 (1989)

    Google Scholar 

  • Nickell, S.: Biases in dynamic models with fixed effects. Econometrica 49(6), 1417–1426 (1981)

    Google Scholar 

  • NITI Aayog: Make in India Strategy for Electronic Products. New Delhi: Government of India (2016)

  • Nurkse, R.: The theory of development and the idea of balanced growth. In: Mountjoy, A.B. (ed.) Developing the Underdeveloped Countries. London: Macmillan Press (1971)

    Google Scholar 

  • Rajan, R., Zingales, L.: Financial dependence and growth. Am Econ Rev 88(3), 559–586 (1998)

    Google Scholar 

  • Rewilak, J.: The role of financial development in poverty reduction. Rev Dev Finance 7(2), 169–176 (2017)

    Google Scholar 

  • Rioja, F., Valev, N.: Does one size fit all? A reexamination of the finance and growth relationship. J Dev Econ 74(2), 429–447 (2004a)

    Google Scholar 

  • Rioja, F., Valev, N.: Finance and the sources of growth at various stages of economic development. Econ Inq 42(1), 127–140 (2004b)

    Google Scholar 

  • Rodrıguez, F., Rodrik, D.: Trade policy and economic growth: a Skeptic’s guide to the cross-national evidence. NBER Macroecon Annu 15(2000), 261–325 (2000)

    Google Scholar 

  • Rodrik, D.: Unconditional convergence in manufacturing. Q J Econ 128(1), 165–204 (2013)

    Google Scholar 

  • Rodrik, D.: The past, present, and future of economic growth. Challenge 57(3), 5–39 (2014)

    Google Scholar 

  • Rodrik, D.: Premature deindustrialization. J Econ Growth 21(1), 1–33 (2016)

    Google Scholar 

  • Roodman, D.: How to do xtabond2: an introduction to difference and system GMM in stata. Stata J 9(1), 86–136 (2009)

    Google Scholar 

  • Rousseau, P.L., Wachtel, P.: Equity markets and growth: cross-country evidence on timing and outcomes, 1980–1995. J Bank Finance 24(12), 1933–1957 (2000)

    Google Scholar 

  • Ryoo, S.: Banks with market power, sectoral structure and the big push. J Econ 103(1), 1–38 (2011)

    Google Scholar 

  • Samargandi, N., Fidrmuc, J., Ghosh, S.: Is the relationship between financial development and economic growth monotonic? Evidence from a sample of middle-income countries. World Dev 68, 66–81 (2015)

    Google Scholar 

  • Sasabuchi, S.: A test of a multivariate normal mean with composite hypotheses determined by linear inequalities. Biometrika 67, 429–439 (1980)

    Google Scholar 

  • Shahbaz, M., Bhattacharya, M., Mahalik, M.K.: Financial development, industrialization, the role of institutions and government: a comparative analysis between India and China. Appl Econ 50(17), 1952–1977 (2018)

    Google Scholar 

  • Shaw, E.S.: Financial Deepening in Economic Development. New York: Oxford University Press (1973)

    Google Scholar 

  • Stiglitz, J.E.: Lessons from the global financial crisis of 2008. Seoul J Econ 23(3), 321–339 (2010)

    Google Scholar 

  • Stiglitz, J.E., Uy, M.: Financial markets, public policy, and the East Asian miracle. World Bank Res Obs 11(2), 249–276 (1996)

    Google Scholar 

  • Veblen, T.: The Theory of Business Enterprise. C Scribner’s Sons, https://archive.org/details/theorybusinesse00veblgoog (1904). Accessed 26 Sept 2020

  • Veblen, T.: Absentee Ownership and Business Enterprise in Recent Times: The Case of America. George Allen and Unwin Ltd. https://archive.org/details/AbsenteeOwnershipAndBusinessEnterprise (1923). Accessed 26 Sept 2020

  • Williams, K.: Has the finance–growth link been broken? Panel data evidence from Latin America and the Caribbean. Economia 19(3), 404–423 (2018)

    Google Scholar 

  • Zakaria, M., Fida, B.A., Janjua, S.Y., Shahzad, S.J.H.: Fertility and financial development in South Asia. Soc Indic Res 133(2), 645–668 (2017)

    Google Scholar 

Download references

Funding

Dr. Samyukta Bhupatiraju is a recipient of the Indian Council of Social Science Research (ICSSR) Post-doctoral Grant (F. No. 3-31/2018-19/PDF) and she gratefully acknowledges the financial support for this paper.

Author information

Authors and Affiliations

  1. Department of Humanities and Social Sciences, Indian Institute of Technology Tirupati, Tirupati, India

    Gouthami Kothakapa & Rahul A. Sirohi

  2. Indian Council of Social Science Research (ICSSR) Postdoctoral Fellow, School of Economics, University of Hyderabad, Hyderabad, India

    Samyukta Bhupatiraju

Authors
  1. Gouthami Kothakapa
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Samyukta Bhupatiraju
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Rahul A. Sirohi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Rahul A. Sirohi.

Ethics declarations

Conflict of interest

Not applicable.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Dr. Samyukta Bhupatiraju is a recipient of the Indian Council of Social Science Research (ICSSR) Postdoctoral Grant (F. No. 3-31/2018-19/PDF) and she gratefully acknowledges the financial support for this paper.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kothakapa, G., Bhupatiraju, S. & Sirohi, R.A. Revisiting the link between financial development and industrialization: evidence from low and middle income countries. Ann Finance 17, 215–230 (2021). https://doi.org/10.1007/s10436-020-00376-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10436-020-00376-y

Keywords

JEL Classification

Search

Navigation