Aspects of financial development and manufacturing and services growth: Which matter?

Abstract

Abstract Financial development (FD) is multi‐faceted and it is not always clear how best to characterize the type or aspect of FD that matters for growth outcomes. Using two‐step system generalized method of moments on the IMF FD indices and a panel dataset of 108 countries spanning seven, 5‐year period averages from 1987 to 2016, this article finds that certain aspects of FD matter more than others in developing economies: financial market (FM) depth, efficiency and access matter for services growth, while both FM and financial institution (FI) depth and FM access matter for manufacturing growth, highlighting the existing complementarities between certain aspects of FI‐ and FM‐based systems that are conducive to growth. These results suggest the importance of developing and strengthening domestic institutions and implementing policies that would be conducive to the faster integration of new technologies towards the better intermediation and use of financial capital for growth and development objectives, without destabilizing the financial sector.

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