Does financial development foster economic globalization in emerging economies? Time series evidence from China and India

Abstract

This study explores the role of financial development in economic globalization for India and China by controlling economic growth, institutional quality, inflation, government investment, and real interest rate as crucial determinants. Using annual time series data from 1984 to 2018, the long-run estimates from ARDL model reveal that financial development, institutional quality, and government investment significantly drive economic globalization. We also find that the inflation rate offsets economic globalization in India but promotes it in China. Interestingly, while economic growth promotes economic globalization in India, it impedes in China. The varying effects of real interest rates on economic globalization are observed in both economies. These findings offer key macroeconomic policy.

KEYWORDS:

• Financial sector development
• economic globalization
• economic growth
• comparative perspective for emerging economies
• India and China

JEL Classifications:

• O47
• G10
• F00
• N20
• O53

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data can be available from the authors upon request.

Notes

1 Economic globalization is understood when economies are open to trade and financial transactions with other countries (Dreher 2006; Mishkin 2007, 2009). Globalization is further understood when connections between people occur (Scholte 2008). Similarly, Waters (1995) and Friedman (1999) argue that economic globalization not only integrates markets and societies but also reduces the geographical restrictions. We are thankful to one of the reviewers for suggesting us to conceptualize economic globalization.

2 More specifically, on account of availability of economic globalization and financial development index data in India and China till the year 2018, our analysis is restricted to focus on for the period 1984–2018.

3 The new KOF globalization index proposed by Gygli et al. (2019) is better than the Dreher’s (2006) KOF index of economic globalization. The reason is that the new globalization index uses the 43 variables instead of 23 variables used in the earlier index. Moreover, the new KOF globalization index is calculated on a yearly basis from 1970 to 2016 for 203 countries and territories, whereas old KOF globalization index is estimated on a yearly basis from 1970 to 2000 for 123 countries. The KOF globalization index includes social, political and economic globalization index.

4 We are also thankful to the one of the reviewers for suggesting us to use the cointegration test that endogenously captures the regime changes occurring in two emerging economies like India and China.

5 This test is more appropriate to check for the presence of cointegration in presence of structural changes or regime changes. This is known as cointegration test accommodating the single unknown structural break. This test has the ability to reject the null-hypothesis of non-existent long-run relationship in case of a structural break.

6 Since ARDL results on Model2 in Table A3 (Appendix) are almost consistent with ARDL results based on Model1 in Table 5 for both the countries, therefore it is not again presented in Table 5 to avoid the repetition and conserve the space. Rather, it is now presented in Table A3 of the Appendix.

7 Few existing studies also supported the unidirectional causality from financial development to trade openness in China and 47 African countries (Fan et al. 2018; Mbratana, Fotié, and Amba 2021). The positive impact of financial development on FDI inflows are also found in 16 Arab economies (Aziz and Mishra 2016) and in 63 poorer countries (Kim, Lin, and Suen 2012).

8 Since FDI and remittance inflows are a part of economic globalization (Dreher 2006; Gygli et al. 2019), therefore our study compares with existing studies where they examined the impact of financial development on globalization.

9 Since the trade openness is a part of economic globalization (Dreher 2006; Gygli et al. 2019), therefore our study compares with existing studies where they examined the impact of financial development on globalization.

10 Both CUSUM and CUSUMsq graphs are not reported here due to the space constraint of the journal. However, this can be available upon request from the authors.