Economic growth, development of telecommunications infrastructure, and financial development in Asia, 1991–2012

Highlights

• We construct a development of telecommunications infrastructure (DTI) index.

• We assess relationships between DTI, financial development, and economic growth.

• We consider causal relationships for 21 Asian countries (1991–2012) in four regions.

• We use a panel vector auto-regressive model to detect direction of causality.

• We find Granger-causality among the variables, short-term and long-term, by region.

Abstract

We use principal component analysis (PCA) to construct an index for the development of telecommunications infrastructure (DTI), and an index for financial development. We then assess the causal relationship among DTI, financial development, and economic growth in 21 Asian countries between 1991 and 2012. We study the Asian countries in four regional groups, and use a panel vector auto-regressive (VAR) model to detect the direction of causality among the three variables. Our results reveal that there is Granger-causality among the variables, both in the short run and in the long run, although the exact nature of the results varies by region in Asia.

Introduction

Schumpeter's (1911) theoretical proposition that financial development is an important determinant of a country's economic growth has received much attention in recent literature (for instance, see Cole et al., 2008, Levine, 2005). The proposition is logical, since a well-developed financial system greases the wheels of economic activity. Higher savings and investments facilitate further development of the economy on several fronts, including commercial and technological. Thus, many economists regard financial development as a key driver of economic growth (Hsueh et al., 2013, Samargandi et al., 2015, Schumpeter, 1911).

Two issues relevant to the relationship between financial development and economic growth need to be empirically examined: first, the determinants and sources of financial development; second, the long-run equilibrium relationship between financial development and economic growth, and the direction of causality between the two variables. The empirical literature on this topic has followed two main econometric approaches: cross-country and time series studies. Cross-country regressions have examined the determinants of financial development (Beck et al., 2000, Cole et al., 2008, King and Levine, 1993), whereas time series regressions have identified the limitations associated with cross-country regressions. Economists have long sought evidence for a long-run relationship between the variables (Levine, Loayza, & Beck, 2000). The current study uses panel data (that is, it uses both cross-country and time series data) to present new evidence on the causal relationship between financial development and economic growth.

The innovation in this paper, compared to the existing literature on the financial development-economic growth nexus is that we use a trivariate framework in which, in addition to economic growth and financial development, we incorporate a third variable, namely the development of telecommunications infrastructure (DTI). This links the literature examining the causal nexus between financial development and economic growth to the literature that investigates the link between DTI and financial development. Our simultaneous consideration of DTI is important, since telecommunications technology is likely to be linked to both economic growth and financial development in increasingly globalized and interconnected economies around the world. In this context, it should be noted that economic growth theory has always maintained that economic development includes a process of innovation. Thus it may be argued that the interactions between developments in both the financial and information technology sectors provide a driving force for dynamic economic growth (see, for example, Sassi & Goaied, 2013).

Two additional novel features of the study are that, first, we use a large sample of Asian countries, both developed and emerging, over a long period, but include recent data (1991–2012); and second, we use advanced panel cointegration and causality tests to arrive at our results. Neither approach has to date been used in studies that examine the causal nexus between these variables in Asian countries for both the short and the long run.

This research contributes information to economic and political decision-makers to empower them to enhance social upliftment among the inhabitants of their countries, because if there is any causality between economic growth, financial development, and telecommunications infrastructure, understanding that association can facilitate efficient allocation of infrastructure investment in a particular country. Moreover, potential investors and fund managers can use the results of this study as additional information to support their investment decisions.

The rest of this paper is organized as follows: Section 2 presents a literature review and rationale for the analysis; Section 3 sets out the methods used in the study; Section 4 discusses the empirical results; and finally, we summarize findings and provide a conclusion in Section 5.