The Effect of Financialization on Economic Growth in Developing Countries with Large Financial Sectors

Abstract

In recent decades, financialization has emerged as a significant phenomenon shaping global economies. It refers to the increasing role of financial markets, institutions, and practices in the overall functioning of economies, often at the expense of the real economy. The purpose of the study is to identify the impact of financing on economic growth in developing countries with a large financial sector. While developing countries are typically characterized by lower levels of economic development and industrialization, some of them may have relatively large financial sectors. In this study, we profile seven developing countries with significant financial sectors. The countries include Brazil, India, Indonesia, Malaysia, Mexico, Singapore, and South Africa. The paper begins by examining the theoretical perspectives on financialization, which argue that financialization should promote economic growth through the Gross Value Added. We study the effect of financialization on economic growth using panel data econometric models, which include the Feasible Generalized Least Squares, Pooled Ordinary Least Squares, Fixed Effects, and Random Effects. The study deploys annual data from 1996 to 2022. This study finds that financialization has a positive and highly significant effect on the economic growth of developing countries with large financial sectors.