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Nexus between Financial Sector Development andEconomic Growth:
Empirical Analysis of 112 Countries＊UYANGA Jadamba

SURUGA Terukazu＊＊
Ⅰ. Introduction
International statistics show that almost 30 percent of total world population lives onless than $765 GNI per capita per year in 2005. In comparison, this indicator for
developed countries is more than $9,385 per year. This huge difference in per capita
income can be accounted for by various factors which affect long-run economic
growth. One of the vital aspects that contribute the economic growth is the financial
sector development.
According to Levine（2004）the financial instruments, the markets, and theintermediaries are the factors of financial sector development that can promoteeconomic growth. Well-functioning financial intermediaries and markets can promote
long-run economic growth（Beck et.al, 2001）. However, the financial sector
development varies across countries because of different degree of the financial
intermediation, the rule of law, and a number of other endogenous and exogenous
reasons.
As outlined in a number of studies, financial sector development can affect economic
growth through five main functions. Efficiently allocated savings can offer low costfinancial resources for industry and firms. Moreover, financial intermediaries help
decrease transaction costs, and thereby encourage deposits. Thus, they in turn,increase the funds available for investment. Managing and reducing risk can weaken
the uncertainty of investment projects and strengthen deposits. The financial
intermediaries prepare information on borrowers and provide this information to＊Lecturer, Finance and Banking Department, School of Economic Studies, National University of Mongolia.
＊＊Professor, Graduate School of International Cooperation Studies, Kobe University.

Journal of International Cooperation Studies, Vol.15, No.3（2008.3）

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deposit owners in their role of producing information. Monitoring firms and exerting

corporate governance can induce managers to maximize firm s value and improve
allocation of resources. At the same time, the effectiveness of corporate governanceimpacts firm performance with potentially substantial consequences on national
economic growth rates. By easing exchange function, financial arrangements lower
transaction costs which promote specialized production function, technologicalinnovation and growth. The financial arrangements lower transaction costs that will
facilitate greater production specialization. Thus, markets that promote exchange
encourage productivity gains and financial market development.
A number of studies have looked at the relationship between the financial sector
development and economic growth. According to King and Levine（1993）, the capital
accumulation and technological innovation are main channels for economic growth.
King and Levine argued that efficient saving policies can change capital accumulationand technological levels. Hermes and Lensink（2003）found that financial sector
development is essential for productive FDI that leads to economic growth. Allen andLeonce（1998）argued that the financial sector development provides a motivation toincrease fruitful investment.
In order to find nexus between financial sector development and economic growth
this paper reexamine the role of financial sector development in the long run economic
growth based on King and Levine s model（Levine, 1997, 2004）using panel data
analysis for 112 countries. This paper uses the ratio of private sector credits to GDP
and the ratio of liquid liabilities to GDP for financial sector development indicators.
The results of full sample regressions show that financial sector development
indicators

have a statistically significant effect on economic growth. The estimation

results show that a 10 percentage point increase in private sector credits increases
growth rate by 0.31 percentage point. In low and lower middle income group, andupper middle and high income group countries results also show that financial sector
development indicators, the ratio of private sector credits to GDP and the ratio of
liquid liabilities to GDP, have robust, significant and positive impacts on economic
growth.
The paper is organized as follows. Section II presents a theory and a literature
review of studies conducted on financial sector development and economic growth.

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97

The studies are divided into three categories based on different data set such as crosssection, time series, and panel data analyses. Section III discusses the empirical model,
the data and methodology. Section IV presents the results and interpretations of theempirical analysis for different income group countries using five-year average panel
data for 33 years. The conclusions are presented in Section V.

Ⅱ. Literature Review
Many empirical studies attribute the sources of economic growth to factors such as
educational attainment, institutional development, factor accumulation, foreign direct
investment, savings, government consumption, investment level, resource endowments,and financial sophistication. The relationship between financial sector development andeconomic growth has long been an interest for economists.
According to Levine s（1997）definition, financial sector development can occur
when financial instruments, markets, and intermediaries help improve the flow of
information, access to finance, and reduce transaction costs and do a better job atproviding its main functions to produce a sufficiently large effect.
Moreover, Demetriades et al.（1996）noted that financial markets can make adifference on economic decision making, and the allocation of resources, by addressing
information problems and then they lead a positive result on both the volume andpattern of investment, as well as productivity of physical and human capital. These areimportant channels for economic growth.
The more contentious issue in this literature has been the direction of causality
between financial sector development and economic growth. To analyze this view,
Patrick（1966）developed two main hypotheses: the supply-leading and demandleading hypotheses.
The supply-leading concept notes that the development of financial sector can
induce economic growth through savings collection, project valuation, risk
management, management control, and financial institutions. Thus, this can contributeto technological innovation and lead to economic growth. Moreover, according to the
supply-leading hypothesis, financial sector development leads to transfer resourcesfrom traditional sectors to modern sectors and promotes and stimulates anentrepreneurial response in these modern sectors（Roger et al. 2005）.

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The demand-leading concept shows that the economic growth can stimulate thedevelopment of financial intermediation. Economic growth leads to increase thedemand for financial services, which in turn encourages the creation of financial
intermediaries（Roger et.al. 2005）.
The relevant question is: does financial development cause economic growth or does
it simply follow growth generated elsewhere in the economy? Both sides of theargument are supported by several theoretical arguments applying different
methodologies, time periods, and a variety of country case studies.
This paper will re-examine in detail the supply-leading hypothesis by analyzing theliterature that supports the view that financial sector development induces economic
growth. This paper does not look at demand-leading hypothesis for two reasons:・The studies supporting the demand-leading hypothesis is fairly limited;・Some studies failed to link economic growth leads to financial sector development;
The most widely known studies were conducted by King and Levine（1993）, Gregorio
and Guidotti（1995）, Demirguc-Kunt and Maksimovic（1996）, Beck, Levine andLoayza（2000）, Spiegel（2001）, and Gillman et.al（2004）among others. In order tofind more specific outcomes many researchers broaden the areas of investigation by
including stock markets, particular country level studies, and firm and industry level
analyses.

Cross Country Studies
One of the most influential investigations, which examined the relationship between
economic growth and financial sector development using cross country data set, wasdone by King and Levine（1993）. According to King and Levine, the cost of acquiring
information, enforcing contracts and undertaking financial transactions creates
encouragement for the emergence of particular types of financial contracts, markets
and intermediaries.
King and Levine utilized data on 77 countries for the period 1960-1989, by applying
four different indicators of financial developments 1, and three different growthindicators2. The result shows that the financial sector development can affect economic
growth through two channels, namely capital accumulation and technologicalinnovation. Moreover, the financial sector development positively influences both theNexus between Financial Sector Development and Economic Growth: Empirical Analysis of 112 Countries

rate of investment and total factor productivity growth.

99

Financial system affects

capital accumulation either by altering the saving rates or by reallocating savings
among different capital producing technologies. （Levine, 2004, p.5）

Time Series Studies
To evaluate the impact of financial sector reforms on economic growth of India,
Bhattacharya and Sivasubramanian（2003）used the techniques of unit root andcointegration analysis for their study. In order to estimate the impact of financial
sector reforms, authors statistically tested whether there has been any significant
effect of financial liberalization on the linear relationship between GDP and Broad
Money. The result shows that money, the independent variable, had a statisticallysignificant and positive effect on GDP growth in the case of Indian economy. Authors
concluded that Indian economy has some long run equilibrium relationship between
GDP and broad money.
Demetriades and Hussein（1996）conducted a time series analysis on not highly
developed 16 countries for period of 1960 to 1990. They find a stable long-run
relationship between indicators of financial development and economic growth.
However, the direction of causality varies considerably across countries.

Panel Data Studies
According to many time series studies, one size does not fit all in the case of thefinance-growth relationship. It led a number of authors to apply a panel data analyses
for examining the nexus of economic growth and financial sector development. A
panel sample of indicators of financial development is likely to provide a significant
increase in information relative to a simple cross section study.
Benhabib and Spiegel（2000）examined whether financial development affects
growth solely through its contribution to growth in factors of production, namely,
physical capital and human capital, or factor accumulation rates. They explored therole of financial variables in accounting for growth and investment rates acrosscountries. According to their findings, economic growth depends on two main factors,
a nation s enhancement of technology and factors of production. The results show that
financial sector development positively influences both rates of investment and total

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factor productivity growth.
Hermes and Lensink（2003）empirically investigated the role of the development of
the financial system which plays in enhancing the positive relationship between
Foreign Direct Investment（FDI）and economic growth. They argue that economic
growth will occur only after less developed countries have improved their domestic
financial systems. The findings suggest that less developed countries should improvetheir domestic financial system before liberalizing the capital account to allow for FDI.
Allen and Leonce（1998）conducted research on financial intermediation andeconomic growth in Southern Africa3. However, the study did not find a strong
positive effect of credit indicators on economic growth for the Southern Africancountries. The authors argued that in order to have positive effect on economic
growth, financial sector development needs expansion of the financial system to beaccompanied by an increase in the flow of funds to fruitful investment activities.
A number of these research lead to a positive long-run association between financial
sector development and economic growth. This conclusion supports the supply-leading
hypothesis that financial sector development leads to economic growth.

Ⅲ. The Empirical Model
The financial system influences the allocation of resources across time and space（Levine, 2004, pp.5）. King and Levine s model（1993）look at how the financial system
can affect the steady state by altering the rate of technological innovation. The
theoretical approach is based on four main steps to achieve economic growth, namely,market friction, financial markets and intermediaries, financial functions, and channels
to growth.
According to King and Levine, the first step for economic growth is to focus onmarket frictions which consist of the information and the transaction costs. Manyother researchers showed how well-developed financial systems reduce theinformation and the transaction costs, and influence the saving rates, the investment
decisions, the technological innovation, and the long-run economic growth rates.

Financial markets and intermediaries are the second step for King and Levine smodel.

Without intermediaries, each investor would face the large fixed costassociated with evaluating firms, managers, and economic conditions. （Levine, 2004,

Nexus between Financial Sector Development and Economic Growth: Empirical Analysis of 112 Countries

101p.7）Financial intermediaries may reduce the cost of acquiring and processing
information and thereby improve resource allocation（Boyd and Prescott, 1986）.
Financial markets and intermediaries can also provide functions of financial system byassisting to mobilize savings, allocate resources, exert corporate control, facilitate risk
management, and ease trading of goods, services and contracts in the third stage.
Lastly, King and Levine assumed that the two key channels for economic growth arecapital accumulation and technological innovation.
According to Levine, on technological innovation, growth models focuses on theinnovation of new production processes and goods（Romer, 1990, Grossman et al.,1991）. On capital accumulation, growth models uses either capital externalities orcapital goods produced using constant returns to scale（Romer, 1986, Lucas, 1988）. In
these models, the functions performed by the financial system affect steady state
growth by influencing the rate of capital formation（Levine, 1997, pp.691）. Levineargued that the financial system affects capital accumulation either by altering thesaving rate or by reallocating savings among different capital producing technologies（Levine, 1997, pp.691）.
This paper s empirical analysis is based on King and Levine s model（Levine, 1997,2004）, and estimates the ratio of private sector credits to GDP（PRIVY）and the ratioof liquid liabilities to GDP（DEPTH）for financial sector development. The full sample
includes 112, low income and lower middle income group includes 67, and upper
middle and high income group includes 45 countries respectively. Most of studies havebeen using the DEPTH4 or the PRIVY in order to measure the financial sector
development for their analyses.
The DEPTH indicator measures the size of financial intermediaries in the country,
and is defined by the ratio of liquid liabilities of the financial system,（money andquasi money（M2））,to the GDP.

Liquid Liabilities
DEPTH＝────────
GDP

（1）

The PRIVY indicator measures the total credit which was provided to private
enterprises, and is defined by the ratio of private sector credits to the GDP.

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Private Sector Credit
PRIVY＝──────────
GDP

（2）

The estimated model

G（j）＝α＋βF（i）＋γX＋ε

（3）5

・G
（j）represents the value of the j th economic growth indicator;
・F（i）represents the value of the i th indictor of financial sector development
averaged over the period;
・X represents a matrix of variables which control for other factors associated witheconomic growth such as income per capita, education, political stability, exchange
rate, trade, fiscal, monetary policy, etc.
・εrepresents a disturbance term.

The empirical model of per capita GDP growth rate is given:

Growthi＝α＋β1Depthi＋γ1InGDPi＋γ2Edui＋γ3Govi+γ4Cpii＋γ5Openi＋γ6FDIi＋γ7Savei＋ε（4）・Growth is the five-year average growth rate of real per capita GDP;・Subscript i represent each country among n countries in total sample;
The following section discusses the finding on studies conducted to examine therelationship between growth rate and such factors as initial per capita GDP, education,
government expenditure, trade openness, etc.

Initial Per Capita GDP
Sala-i-Martin et.al（2004）used data collected by Heston et.al（2001）and utilized
the initial level of per capita GDP to test the conditional convergence, which has asignificant impact on economic growth. A number of studies conducted by Barro andLee（1994）, Sala-i-Martin and Barro（1992）, Ben-David（1993, 1996）, Levine（1997）,
and Romer（1993）found that initial level of per capita GDP has a negative andstatistically significant relationship with economic growth.

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Education Enrollment
Barro（1991）found the growth rate of real per capita GDP is positively related toinitial human capital（by 1960 school enrolment rates）and negatively related to theinitial（1960）level of real per capita GDP. The poor countries tend to catch up withrich countries if the poor countries have high human capital per person. （Barro, 1991,
pp.437）. The studies conducted by Levine et.al（1997）, Knowles et.al（1995）foundthat the overall education level indicator has a positive and statistically significant
impact on economic growth.

Government Expenditure
The ratio of expenditures on government consumption to GDP（Barro and Lee, 1993）
has a negative association with economic growth. The public consumption6 does nottend to contribute to growth directly, but it needs to be financed with distortion taxes
which hurt the growth rate. （Sala-i-Martin et al., 2004, pp.829）Barro and Lee（1994）,
Levine et al.（1992）, Sachs et al.（1995）, and Sala-i-Martin,（1997）also found thatgovernment consumption has a statistically significant and negative impact on
economic growth.

Consumer Price Index
Bruno and Easterly（1995）, Fisher（1993）, Levine and Renelt（1992）, and Barro（1997）found that inflation has a negative impact on economic growth. However, someof these results do not show robust impacts. Allen et.al（1998）argued that highinflation distorts economic activity and reduces investment in productive enterprises,
which reduces economic growth.

Trade Openness
Romer et al.（1996）found that one percent rise in the trade openness increases
income per capita by two percent or more. Authors mentioned that trade allows
countries to specialize in accordance with comparative advantages and it can affectthe technological level. Openness reflects not only the influence of policy-induced
distortions（trade protection, capital control）but also influence of natural distortions
arising from size（Berthelemy et al., 1996, pp. 310）
.

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Foreign Direct Investment
Hermes and Lensink（2003）found that FDI helped increase growth by introducing
new technologies, such as new production process, techniques, managerial skills, ideas,
and new varieties of capital goods. In new growth literature, the importance oftechnological change for economic growth has been emphasized.（Grossman andHelpman, 1991; Barro and Sala-i-Martin, 1995）

Gross Domestic Savings
Dornbusch and Reynoso（1989）observed that increased real deposit rates promoteeconomic growth. According to them, higher real interest rates rise domestic savingsand hence increase the available supply of resources for investment. Dornbusch andReynoso also mentioned that economic growth occurs through the quality ofinvestment（Dornbusch and Reynoso, 1989, pp.206）.

Data and Methodology
The empirical analysis in this paper relied on three main data sources to estimate
the financial sector development and long-run economic growth dynamics. The data on
DEPTH and PRIVY, the financial sector development indicators, are obtained from theInternational Financial Statistics, CD-ROM 2005. The data on secondary school
enrolment rate is obtained from Barro and Lee s dataset（2002）. The other variables
are obtained from the World Development Indicators, CR-ROM 2005.

i.

Depth= The ratio of the liquid liabilities to GDP;ii.

Privy = The ratio of private sector credits to GDP;iii. InGDP = The Initial Per Capita GDP, in logarithms;
iv. Edu = Secondary School Enrolment Rate in the gross enrolment;v.

Gov = The ratio of Government Expenditure to GDP;vi. Cpi = The Consumer Price Index;
vii. Open = The ratio of export plus import to GDP, trade openness;viii. FDI = The ratio of Foreign Direct Investment（FDI）to GDP;ix. Save = The ratio of Gross Domestic Savings to GDP;

Nexus between Financial Sector Development and Economic Growth: Empirical Analysis of 112 Countries

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The methodology of the empirical analysis depends on the substantial literature, inwhich growth regression is undertaken by Lucas（1988）, Romer（1990）, Barro（1991）,Beck et.al（2000）,Levine and King（1993）and Levine（2004）.

The analysis is conducted using five-year averaged panel data set because it has anumber of advantages.

A panel provides more precise estimates of the finance

growth relationship. （Levine, 2004, pp. 54）Panel analysis also avoids biases
associated with cross country regression（Levine, 2004）. To analyze more specificcountry cases, the countries are divided into the two income groups according to theWorld Bank classification of 2005.
Low and lower middle income group:■

Low income countries of GNI per capita of $765 or less and lower middle
income countries of GNI per capita of $765 to $3,035 in 2003.

Upper middle and high income group:■

Upper middle income countries of GNI per capita of $3,036 to $9,385 and highincome countries of GNI per capita greater than $9,385 in 2003.

The reason to include two income group countries is to increase the number ofobservations that can be estimated with fixed effect methods.

Ⅳ. Results and Interpretations
The estimates were carried out using five-year panel data from 1970 to 2003 with
fixed effects estimations. The purpose of this analysis is to empirically investigate thehypothesis that financial sector development has a significant and positive impact on
the growth rate of the economy.
Presented below are authors findings for each indicator. Overall these results are
consistent with those of other researchers findings.

The Result of Full Sample
Table 1 presents the results of regressions using the full sample of 112 countries7.
The results of full sample regressions（1）（5）showthat financial sector development
indicators,（DEPTH and PRIVY）, have a significant and predicted positive impact on
economic growth at 5 percent significant level. The coefficient of PRIVY（reg.1）

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shows that a 10 percentage point increase in Privy increases growth rate by 0.31
percentage point in the period of 1970 to 2003. It is quite a big impact on economic
growth which leads to the conclusion that the financial sector development is an
important aspect to economic growth.

Initial Per Capita GDP and Government Expenditure
The full sample regression results show that the initial per capita GDP and thegovernment expenditure explanatory variables have statistically significant andnegative impacts on economic growth. The coefficients of the initial per capita GDP（reg.3）and the government expenditure show that a 10 percentage point increase inthese variables decreases economic growth by 1.06 and 4.49 percentage point
respectively.

Trade Openness and Foreign Direct Investment（FDI）
Other explanatory variables, trade openness, and FDI have statistically significant
and positive impacts on economic growth. The coefficient of the openness（reg.4）
shows that a 10 percentage point increase in the trade openness increases economic
growth by 0.24 percentage point. This means that more the trade openness more theeconomic growth.

Gross Domestic Savings
Dornbusch et.al（1989）argued that more savings give more opportunity for future
investment which can promote economic growth. Furthermore, studies by Hermes etal.（2003）, Grossman et al.（1991）, and Barro and Sala-i-Martin（1995）also found thatnew technology and know-how are the fruits of well functioned and efficiently used
FDI in the economy.
In the case of the gross domestic savings, regression（5）shows that a 10
percentage point increase in the saving increases growth by 0.25 percentage point.
The results of theoretical and empirical research suggest that trade openness, FDI,
and gross domestic savings can affect the technology level, which leads to economic
growth.

Nexus between Financial Sector Development and Economic Growth: Empirical Analysis of 112 Countries

Table 1. Financial sector development and economic growth

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The Results of Low Income and Lower Middle Income Countries
Table 2 presents the results of regressions for the low and lower middle income
countries. The financial sector development indicators, PRIVY and DEPTH, haverobust, statistically significant and positive impacts on economic growth. The
coefficient of the depth（reg.6）shows that a 10 percentage point increase in the ratioof the liquid liabilities to GDP increases the economic growth by 0.38 percentage point.
The PRIVY entered 5 percent significant level to economic growth in low and lower
middle income countries.

Initial Per Capita GDP and Government Expenditure
The initial per capita GDP and government expenditure still registered a negative
impact and robustly entered at 5 percent significant level to growth. Moreover, Jeffrey（1997）confirmed that large budget deficits or heavy tax burdens might retard
growth. For instance, government borrowing can crowd out private capital
accumulation. Also, unbalanced government fiscal policy might be a symptom of otherrelated problems such as an overall lack of good governance that could adversely
affect a country s productivity growth.

Trade Openness, Foreign Direct Investment and Gross Domestic Savings
Trade openness, FDI and gross domestic savings have a robust and positive
correlation with economic growth. The estimated regression（8）shows that a 10
percentage point increase in openness, FDI, and savings increase economic growth by
0.38, 1.29, and 0.15 percentage point respectively. The results are consistent with
Romer et al.（1996）, Grossman and Helpman（1991）, and Barro and Sala-i-Martin（1995）s findings.
Jeannine（2000）argued that the domestic financial sector plays a pivotal role inensuring that international capital flows do indeed promote economic growth indeveloping countries. The capital inflows foster higher economic growth, above andbeyond any effects on the investment rate, but only for economies where the banking
sector has reached a certain level of development. （Jeannine, 2000, pp.15）

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Table 2. Financial sector development and growth

The Results of Upper Middle and High Income Countries
Regressions（12）to（14）in Table 3 present results for upper middle and highincome 45 countries. The PRIVY and DEPTH, financial sector development indicators,
have significant impacts on economic growth in these group sample countries. The
coefficient of DEPTH（reg.13）shows that a 10 percentage point increase leads toincreases in economic growth by 0.69 percentage point.
Furthermore, the initial per capita GDP has a significant and negative impact on
economic growth. This explanatory variable has a strong robust and negative impact
on economic growth for all estimated regression results.

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Table 3. Financial sector development and growth（Dependent variable: Growth rate of Real Per Capita GDP）

Regression（12）and（13）show the gross domestic savings has a positive andsignificant impact on economic growth. The coefficient of DEPTH（reg.13）shows thata 10 percentage point increase in the ratio of liquid liabilities to GDP increases the
economic growth by 0.69 percentage point per year. This result supports Dornbusch
and Reynoso s（1989）well-known findings. These empirical findings support theinvestigated hypothesis that the financial sector development significantly andpositively affects the economic growth of different income group countries. Financial
sector development can help developing countries by increasing the economic growth.
It can also help developed countries sustain the achieved growth.

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Ⅴ. Conclusion
This paper re-examines the link between financial sector development and economic
growth. It reviews the literature on this subject. Moreover, this paper conducts
empirical analysis for 112 countries to study the nexus between financial sector
development and economic growth. The empirical study investigates the hypothesisthat financial sector development has a significant and positive impact on the economic
growth rate of a country. The major findings of this study are as follows:As outlined in a number of studies, a well developed financial system can reduce theinformation and transaction costs, increase the saving rates and the investment
decisions, enhance technological innovation, and contribute to the long-run economic
growth.
The DEPTH（to measure the size of financial intermediaries）and PRIVY（tomeasure the allocation of credits in the market）are the main indicators of financial
sector development in all stages of economic development.
The empirical analyses show the evidence that financial sector development has apositive and significant impact on economic growth. The results of regression analysis
for full sample analysis（112 countries）show that financial sector development
indicators, DEPTH, and PRIVY, have the predicted positive signs at the 5 percent
level of significance. The coefficient of PRIVY shows a 10 percentage point increase in

PRIVY increased economic growth by 0.31 percentage point during the period of 1970
to 2003 for the countries studied in this paper.
The results of the regression analysis for the low and lower middle income countries（low income countries of GNI per capita of $765 or less and lower middle income
countries of GNI per capita of $765 to $3,035 in 2003）show that the financial sector
development indicators, PRIVY and DEPTH, have robust, significant and positive
impacts on economic growth. The coefficient of DEPTH shows that a 10 percentage
point increase in the ratio of liquid liabilities to GDP increases economic growth by
0.38 percentage point.
The results of the regression analysis for the upper middle and high income

countries（upper middle income countries of GNI per capita of $3,036 to $9,385 andhigh income countries of GNI per capita greater than $9,385 in 2003）also confirmedthat the PRIVY and DEPTH, are robustly significant at 5 and 10 percent level and

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show a positive impact on economic growth. The coefficient of DEPTH shows that a
10 percentage point increase leads to increases in economic growth by 0.69 percentage
point.
Although this study focused on financial sector development, some other interesting
results were found for all estimated regressions which support the findings of otherresearchers. First, the initial per capita GDP and the government expenditureexplanatory variables have statistically significant and negative impacts on economic
growth. Secondly, trade openness, and FDI variables have statistically significant andpositive impacts on economic growth. On the gross domestic savings, a 10 percentage
point increase in the savings enhances economic growth by 0.25 percentage point.
These findings lead to conclude that trade openness, FDI, and gross domestic savings
can affect the technology level and capital accumulation, which drives to economic
growth.
Although some economists have found important evidences, this topic needs more
research on financial structure and its effect on economic growth. Specifically, it needsa more specific analysis on how market and bank based on financial structure lead toeconomic growth.

Notes
１

The size of financial intermediaries, DEPTH, ratio of liquid liability and GDP; BANK, the degree towhich the central banks in contrast to commercial banks are allocating credit. PRIVATE, the ratio ofprivate sector credit to total credit; PRIVY measures the ratio of private sector credit to GDP;
２ Growth rate of real capita GDP; Growth rate of capital stock per capita and Total factor productivity
growth;３ The regression sample included eight Southern Africa countries as well as Botswana, Lesotho,
Mauritius, Malawi, Swaziland, South Africa, Zambia, and Zimbabwe.
４ Many researchers have been using the LIQUID LIABILITY or CREDIT indicators which have a samedefinition with the DEPTH and PRIVY from Levine.
５ The estimated equation was firstly tested by King and Levine（1993）.
６ Some authors refer to public consumption instead of the government expenditure;
７ Name of sample countries listed in appendix 1.

References
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Nexus between Financial Sector Development and Economic Growth: Empirical Analysis of 112 Countries

APPENDIX 1

List of countries included in the empirical analysis
HIGH INCOME AND UPPER MIDDLE 45 COUNTRIES

1. Australia
2. Bahrain
3. Canada
4. Cyprus
5. Denmark
6. Finland
7. France
8. Germany
9. Hong Kong, China
10. Iceland
11. Ireland
12. Israel
13. Italy
14. Japan
15. Korea
16. Kuwait
17. Mali
18. New Zealand
19. Norway
20. Singapore
21. Sweden
22. Switzerland
23. United Arab Emirates
24. Unites States
25. Argentina
26. Barbados
27. Belize
28. Botswana
29. Chile
30. Costa Rica
31. Dominica
32. Gabon
33. Hungary
34. Latvia
35. Malaysia
36. Mexico
37. Oman
38. Panama

39. Saudi Arabia
40. Seychelles
41. St. Kitts and Nevis
42. St. Vincent and the
Grenadines
43. Trinidad and Tobago
44. Uruguay
45. Venezuela

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LOW AND LOWER MIDDLE INCOME 67 COUNTRIES

1. Bangladesh
2. Benin
3. Burkina Faso
4. Burundi
5. Cameroon
6. Central African Republic
7. Chad8. Congo, Dem.Rep
9. Congo, Rep
10. Cote dﾕIvoire
11. Gambia
12. Ghana
13. Guinea-Bissau
14. India
15. Kenya
16. Lesotho
17. Liberia
18. Madagascar
19. Malawi
20. Malta
21. Mauritania
22. Nepal
23. Nicaragua
24. Nigeria
25. Pakistan
26. Papua New Guinea
27. Rwanda
28. Senegal
29. Sierra Leone
30. Solomon Island
31. Sudan
32. Suriname
33. Swaziland
34. Togo
35. Zambia
36. Zimbabwe
37. Algeria
38. Bolivia
39. Brazil
40. Chile

41. Colombia
42. Dominican Republic
43. Ecuador
44. Egypt. Arab Republic
45. El Salvador
46. Fiji
47. Guatemala
48. Guyana
49. Honduras
50. Indonesia
51. Iran, Islamic Rep
52. Jamaica
53. Jordan
54. Morocco
55. Paraguay
56. Peru
57. Philippines
58. Samoa
59. South Africa
60. Sri Lanka
61. Suriname
62. Swaziland
63. Syrian Arab Republic
64. Thailand
65. Tunisia
66. Turkey
67. Uruguay