A number of theoretical and empirical studies have indicated that the development of financial intermediaries has contributed to promote economic growth and reduce income inequality and poverty around the world. In these studies, financial development is typically referred to as “financial deepening” and is perceived as the increased scale of the financial sector in the real economy. In fact, financial deepening is considered a powerful tool for economic development, although the expanding financial system does not necessarily cater to the needs of all customers equally. Accordingly, new approaches to examine financial development have received a great deal of attention recently, such as “financial access,” “financial inclusion,” and “financial permeation.” Such approaches are defined generally as the process by which financial intermediaries improve the accessibility and convenience of financial services for users by establishing extensive national networks. They are expected to reduce funding constraints and promote the economic activities of individuals and companies that were previously unable to utilize financial services.
In this symposium, we reconsider the roles of financial development in the developing world from the viewpoints of financial access and financial deepening. Following a call for articles by the Society for the Study of Emerging Markets (SSEM) and the Kobe Laboratory for Asian Development Studies (Kobe LADS), this special section consists of the following five empirical studies. The first three studies examine the impacts of financial deepening on economic growth, employment, and inequality, and the remaining two studies analyze the effects and determinants of financial access in developing countries.
A number of recent studies have examined the relationship between financial intermediation and economic growth in China, although there are widely different viewpoints on this relationship. The first article, titled “Financial Intermediation and Economic Growth in China: New Evidence from Panel Data,” reinvestigates this issue. It does so by applying the generalized method of moments (GMM) to panel data from twenty-eight Chinese provinces over the period 1978–2008. The empirical results show that various measures of financial development are generally associated with economic growth. Specifically, the ratios of total loans and total deposits in the financial sector to GDP have a significantly negative impact on economic growth, suggesting that financial intermediation impedes growth in China. This finding may be explained by the observed negative correlation, which is probably the result of China’s country-specific problems, such as the inefficiency of state-controlled financial systems.
The second article, titled “Financial Development and Income Inequality: Long-Run Relationship and Short-Run Heterogeneity,” uses a pooled mean group estimator to derive the long-run and short-run relationship between financial development and income inequality for eighty-eight countries over the period 1961–2012. So far, substantial evidence has accumulated that financial development accelerates long-run economic growth. By comparison, there has been less analysis to examine empirically the| relationship between financial development and income inequality; those studies that have addressed this issue provide mixed results. This study contributes to the literature by distinguishing between long-run and short-run effects of financial development on income inequality and presenting evidence that financial development can have different and even contradictory effects on inequality depending on the time horizon. The study finds that financial development measured by private domestic credit asa percentage of GDP reduces inequality in the long run, while it may increase inequality in the short run. In addition, the study finds that adverse short-run effects of financial development are associated with countries’ greater susceptibility to crises and poor quality of governance. The key implication is that good governance is important for achieving inclusive growth though financial development.
The third article, titled “Financial Access and Economic Growth: Evidence from Sub-Saharan Africa,” examines whether improved access to commercial bank branches has contributed to economic growth by using panel data on thirty-seven countries from Sub-Saharan Africa between 2004 and 2012. Sub-Saharan Africa has long been a poverty-ridden region, lagging behind other regions of the developing world. Since the turn of the century, however, per capita real GDP growth in Sub-Saharan Africa has been rising faster than global growth rates. Furthermore, financial access in this region has shown a relatively better performance in recent years. The empirical results of the GMM estimations in this study clearly indicate that financial access has a statistically significant and robust effect on increasing economic growth. Thus, this study finds that financial access has the effect of promoting economic growth and enriching people’s lives in Sub-Saharan Africa.
The fourth article, titled “Financial Development, Labor Participation, and Employment in Urban China,” focuses on the effects of financial deepening as well as financial efficiency on the labor participation ratio and employment ratio, among other factors. In China, the ratio of the working-age population to the total population decreased for the first time in 2011, and is expected to continue in the future. Therefore, this country faces the challenges of an aging population, while maintaining sustainable growth requires an ample labor supply. The relevant literature indicates that the determinants of labor participation and employment ratios include not only labor and product market institutions but also other factors. By applying a random-effects probit model using panel data, this study finds that financial deepening increases the labor participation probability of the working-age population in the central region, but decreases it in the other regions. In addition, the study finds that the effect of financial deepening on employment probability is statistically significant only in the western region and that employment probability decreases with financial deepening in this region.
The fifth article, titled “Do Workers’ Remittances Promote Access to Finance? Evidence from Asia-Pacific Developing Countries,” empirically analyzes the impact of remittance inflows on access to formal financial services using panel data on thirty-eight developing countries in Asia and Oceania between 2001 and 2012. As finance is increasingly being recognized as a powerful tool to promote economic growth and reduce poverty, a growing body of empirical research has investigated the factors affecting the promotion of financial deepening. A potential leading factor is migrants’ remittances. Indeed, most recent studies find that remittances are positively associated with financial deepening. This study differs from this literature in that it focuses on financial access rather than financial deepening. Financial access is measured by the number of commercial bank branches. The empirical results indicate that an increase in remittances helps to enlarge the branch network and thereby promote financial access. Therefore, the study concludes that remittances would become a catalyst for access to formal finance when potential customers come to know the importance of formal finance and when financial service providers meet customer needs.
Finally, we would like to express our appreciation to Kobe University for financial support. In addition, we truly appreciate Professor Ali M. Kutan, the editor-in-chief of Emerging Markets Finance and Trade for his tremendous generosity and efforts while editing and publishing this special section.
