توسعه مالی، حقوق سیاسی، آزادی های مدنی و رشد اقتصادی: شواهد از جنوب آسیا

A number of existing studies have examined the theoretical link between financial development and economic growth. Kose et al. (2010), among others, have argued that financial development can affect the extent of the benefits from foreign direct investment. Other studies, such as Huang (2010) have suggested that the quality of political institutions can also affect the level of financial development. This implies that the extent of the benefits from financial development also depend on the quality of governance. However, few empirical studies have considered these issues. By making use of panel data over the period 1970 to 2009, this paper focuses on the impact of the interaction of (i) financial development and foreign direct investment and (ii) financial development and the quality of governance on economic growth in South Asia. Our empirical analysis, suggests that financial development has contributed to an increase in the benefits of FDI in South Asia. In addition, improvement in political rights and civil liberties has also enhanced the benefits of financial development in South Asia.

The exiting theoretical literature suggests that financial development not only increases the supply of capital but it also improves the allocation of financial resources. In other words, financial development enhances economic growth through direct as well as indirect channels. The financial sector provides real services and its development can not only help to identify profitable business opportunities but also improve corporate governance (Levine 2005 and Roubini and Sala-i-Martin, 1992). The role of financial development on economic growth is highlighted in the theories of financial structure. These theories include bank-based, market-based, financial service based and law and finance based theories. The bank-based theory emphasizes the positive role of commercial banks in economic development. It has been suggested that banks can finance economic development in its early stages, especially when the banks are unhampered by regulatory restrictions. Banks can also help to mobilize resources and reduce risk (Beck and Levine, 2004, Levine, 2002 and Levine, 2005). The market-based theory highlights the advantages of well-functioning markets in promoting successful economic performance. According to this theory, big, liquid and well-functioning markets foster growth and profit incentives. In addition, well functioning markets also enhance corporate governance, risk management and diversification (Levine, 2005). The financial-services theory, which is based on both the bank-based and the market-based views, stresses the importance of the key financial services provided by the financial system. This theory suggests that financial services contribute to industrial expansion and economic growth (Kose et al., 2010 and Merton and Bodie, 1995). The law and finance theory suggests that the legal system is critical to firm, industry and national economic success (La-Porta et al., 1998 and Levine, 1999).

Since the seminal work of King and Levine (1993), a number of studies have examined the link between economic growth and financial development. However, few studies have focused on South Asia. The aim of this paper is to fill this gap in the existing literature. Unlike Ahmad and Ansari (1998), the empirical analysis presented in this paper covers all South Asian economies. In addition, we consider both the direct and the interaction effects of financial development on economic growth. It has been suggested that the level of financial development also affects the benefits from foreign direct investment. In other words, regions with a higher level of financial development tend to derive greater benefits from foreign direct investment. The recent work of Huang (2010) and Andrianova et al. (2011) suggests that government and political institutions can also affect the level of financial development. Accordingly, we also consider the impact of the interaction between the quality of governance and financial development on economic growth. In this paper we use indices for civil liberties and political rights as a proxy for the quality of governance. None of the existing studies has empirically examined the impact of these interaction effects on economic growth in South Asia. By making use of panel data which covers several decades, this paper concludes that financial development has contributed to economic growth in South Asia. Fixed effects panel and system GMM estimation also reveal that financial development has enhanced the benefits of foreign direct investment in South Asia. In addition, improvements in political rights and civil liberties, through their interaction with financial development, have made a significant contribution to economic growth in South Asia.