Financial development and economic growth: Evidence from a cross-sectional sample, Korea, and Chile

An analysis of the relationship between financial development and economic growth is proposed for the East Asian (especially for Korea) and Latin American (especially for Chile) countries. Although many researchers argue that the development of financial market is positively associated with the real economic growth, there are several contradictory researches to this view. Some argue that there is a negative relationship between financial development and economic growth during the 1970s and 1980s in Latin America. And it is often contended that the intervention by the South Korean government in its financial market was one of a crucial element in its development strategy, which guided the process of economic growth. Korean experience can be viewed as one of a contradictory example for the general view which argues that financial repression has a negative effect on economic growth. The objective of my study is to test whether the degree of financial development contributes to explaining the cross country differences in economic growth, especially in the regions of East Asia and Latin America. Cross-country regression analyses, together with time-series analyses for Korea and Chile, are conducted for this purpose. From the empirical test, it is found that there does not exist a positive relationship between financial development and economic growth in some East Asian and Latin American countries. In this context, I reach the following conclusion: It is possible that financial liberalization of the developing countries can be harmful for their economic growth. And it is also possible that financial repression policies can play a positive role for the economic growth of the developing countries.