Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs

The study determines and analyses the effects of financial intermediation on the growth of real GDP in LDCs by employing annual data for 71 countries over varying periods that generally span the 1960s and 1980s. Based on the modified version of the orthodox model framework and an entirely new model framework that recognizes the external effects of the financial sector on the real sector, as well as effects of the financial sector on the productivities of factor inputs engaged therein, we estimate regression equations for each country. Our findings are as follows: (a) financial intermediation promotes economic growth in about 85% of the countries; (b) as compared with factors that have often been emphasized in the literature (viz. export expansion, capital formation ratio and labour force growth) as important growth promoters, financial intermediation is practically at par with export expansion and capital formation ratio, and superior to labour force growth, as partners in promoting economic growth; (c) the growth-promoting effects of financial intermediation are more predominant in low-income than in high-income LDCs; and (d) the growth-promoting effects of financial intermediation are practically invariant across the various regions of the globe.