Finance, institutions and human development: Evidence from developing countries

Abstract

The paper aims to examine the role of institutions and human development in financial development at early and developing stages of economic development, using data from 52 developing economies during 1985–2008. In order to provide a more comprehensive assessment, especially of the finance-institutions link, we decompose institutions into economic, political and social; and economic institutions into quality of government, intervention of government, and quality of the legal system. The results demonstrate that: (i) institutional quality can explain international differences in the level of banking sector development; (ii) economic institutions and human development are extremely significant for banking sector development; (iii) the legal system is the dominant dimension of economic institutions; and (iv) the combined reforms of economic institutions matter more than separate institutional reforms.

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