Financial Development and Economic Growth: Role of Adaptive Efficiency
Author: Abdul Mateen Hashmi

This study investigates the role of adaptive efficiency for the financial development and the economic growth. The study tests the relationship between the financial development and the economic growth. A highly tested concept of the literature that financial development can lead to the economic growth is revisited in this study with an addition of the adaptive efficiency. It provides the first formal empirical analysis on the “adaptive efficiency”. The concept of adaptive efficiency states that the, flexible institutions can get efficient over the time leading to the higher economic growth. The three types of institutions governance, regulations and business environment are used to form the adaptive efficiency index using PCA. The study is conducted by using 123 developed and developing economies. The analysis is done by using Arellano Bond (1991) estimations, which follows the GMM (generalized Methods of Moments) estimation technique. The results show that the explanatory variables are positive and significant. It indicates that all the exogenous variables can positively affect the dependent variable in the model i.e. economic growth. Both the financial development and the adaptive efficiency can lead to increase the economic growth. In addition to that, the results of interaction term between financial development and adaptive efficiency is also positive and more significant. These results are consistent with the theoretical framework of the study that, financial development through adaptive efficiency can better lead to a higher economic growth. Moreover, in a robustness check through GMM, results show that there is more potential for the explanatory variables in case of developing economies. However, here also the results are positive and significant for both the samples, i.e. developed and developing economies. The study concludes that, there should be a focus on the financial development and the quality of the institutions. To achieve the better adaptive efficiency, policies should form to ensure the quality performance of these institutions. As these institutions for adaptive efficiency are now empirically tested as most important for the economy. Especially, in case of developing economies there is much potential for both the financial development and adaptive efficiency. So the emphasize should be on favorable policies in this regard. Supervisor:- Dr. Abdul Jalil

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Supervisor: Abdul Jalil

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