The effects of the informal economy on the relationship between financial development and economic growth
-
Author(s)Anis KhayatiLink to ORCID Index: https://orcid.org/0000-0002-5520-7354
,
Chokri TerziLink to ORCID Index: https://orcid.org/0000-0002-9478-2941
-
DOIhttp://dx.doi.org/10.21511/imfi.20(3).2023.27
-
Article InfoVolume 20 2023, Issue #3, pp. 321-331
- Cited by
- 189 Views
-
81 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The relationship between economic growth and the development of financial systems has been analyzed from different perspectives for a long time. This paper addresses the effects of the informal economy on the relationship between financial development and economic growth, using a panel data covering 20 countries during the period 1993–2020. The results show that financial development, as measured by the IMF’s Financial Development Index, is positively associated with economic growth (the coefficient α1 related to financial development fd is positive and statistically significant at 5%). The results also show that large sizes of the informal economy moderate the influence of this association (α1 remains positive and statistically significant at 1%, while the coefficient α2 related to the interaction between financial development and informal economy, fd and ie, is negative and statistically significant at 1%). In effect, financial development has the greatest impact on economic growth whenever there is control over the informal economy’s size. Inversely, a favorable ground for the informal economy limits the positive association between financial development and economic growth.
However, the results show the absence of a causality relationship between financial development and economic growth (W-bar = 1.0015 and Z-bar = 0.0048; p-value = 0.9980). The informal economy plays no role in making this type of link significant (W-bar = 0.9761 and Z-bar = -0.0756; p-value = 0.9520).
- Keywords
-
JEL Classification (Paper profile tab)E26, O17, O16, O50
-
References51
-
Tables8
-
Figures0
-
- Table 1. Country and regional effects
- Table 2. Variables
- Table 3. Descriptive statistics (560 observations)
- Table 4. Correlation of variables
- Table 5. Effects of financial development on economic growth: Role of the informal economy
- Table 6. Results of stationarity tests
- Table 7. Results of homogeneity and independence tests
- Table 8. Granger non-causality test results
-
- Ajibola, A. (2017). Capital market development and economic growth in Nigeria. Scholedge International Journal of Management & Development, 4(10), 99-110.
- Aka, B. E. (2005). The Role of Capital Markets in Economic Growth and Development (Doctoral dissertation). Auvergne-Clermont-Ferrand I University.
- Arcand, J. L., Berkes, E., & Panizza, U. (2015). Too much finance? Journal of Economic Growth, 20(2), 105-148.
- Asteriou, D., & Spanos, K. (2019). The relationship between financial development and economic growth during the recent crisis: Evidence from the EU. Finance Research Letters, 28, 238-245.
- Baklouti, N., & Boujelbene, Y. (2019). The economic growth–inflation–shadow economy trilogy: Developed versus developing countries. International Economic Journal, 33(4), 679-695.
- Beck, T. (2012). The role of finance in economic development–benefits, risks, and politics (Vol. 2011, pp. 161-203). New York: Oxford University Press.
- Benczúr, P., & Kvedaras, V. (2021). Nonlinear impact of financial deepening on income inequality. Empirical Economics, 60(4), 1939-1967.
- Benhabib, J., & Spiegel, M. M. (2000). The role of financial development in growth and investment. Journal of Economic Growth, 5, 341-360.
- Berthélemy, J. C., & Varoudakis, A. (1996). Models of financial development and growth. In N. Hermes & R. Lensink (Eds.), Financial Development and Economic Growth, Routledge (pp. 7-29). New York.
- Berthelemy, J. C., & Varoudakis, A. (1998). Financial development, financial reforms and growth: a panel data approach. Revue-Economique, 49(1), 195-206.
- Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization, 83(2), 243-253.
- Bose, N., Capasso, S., & Andreas Wurm, M. (2012). The impact of banking development on the size of shadow economies. Journal of Economic Studies, 39(6), 620-638.
- Canh, N. P., & Thanh, S. D. (2020). Financial development and the shadow economy: A multi-dimensional analysis. Economic Analysis and Policy, 67, 37-54.
- Capasso, S., Cicatiello, L., De Simone, E., & Santoro, L. (2022). Corruption and tax revenues: evidence from Italian regions. Annals of Public and Cooperative Economics, 93(4), 1129-1152.
- Capasso, S., & Jappelli, T. (2013). Financial development and the underground economy. Journal of Development Economics, 101, 167-178.
- Cecchetti, S. G., & Kharroubi, E. (2012). Reassessing the impact of finance on growth (No. 381). Bank for international settlements.
- Chen, H., Hongo, D. O., Ssali, M. W., Nyaranga, M. S., & Nderitu, C. W. (2020). The asymmetric influence of financial development on economic growth in Kenya: evidence from NARDL. Sage Open, 10(1).
- Cournède, B., Denk, O., & Hoeller, P. (2015). Finance and inclusive growth. No 14. OECD Economic Policy Papers from OECD Publishing.
- Dabla-Norris, E. R. A., & Feltenstein, A. (2005). The underground economy and its macroeconomic consequences. The Journal of Policy Reform, 8(2), 153-174.
- Deidda, L., & Fattouh, B. (2002). Non-linearity between finance and growth. Economics Letters, 74(3), 339-345.
- Demetriades, P., & Hook Law, S. (2006). Finance, institutions and economic development. International Journal of Finance & Economics, 11(3), 245-260.
- Dreher, A., Kotsogiannis, C., & McCorriston, S. (2009). How do institutions affect corruption and the shadow economy? International Tax and Public Finance, 16, 773-796.
- Eggoh, J. C., & Villieu, P. (2014). A simple endogenous growth model of financial intermediation with multiplicity and indeterminacy. Economic Modelling, 38, 357-366.
- Elgin, C, M Kose, F Ohnsorge and S Yu (eds) (2021). Understanding Informality (CEPR Press Discussion Paper No. 16497).
- Elgin, C., & Uras, B. R. (2013). Is informality a barrier to financial development? SERIEs, 4, 309-331.
- Gaytan, A., & Rancière, R. G. (2004). Wealth, financial intermediation and growth. UPF Economics and Business Working Paper, 851.
- Gharleghi, B., & Jahanshahi, A. A. (2020). The shadow economy and sustainable development: The role of financial development. Journal of Public Affairs, 20(3).
- Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113-126.
- Hajilee, M., Stringer, D. Y., & Metghalchi, M. (2017). Financial market inclusion, shadow economy and economic growth: New evidence from emerging economies. The Quarterly Review of Economics and Finance, 66, 149-158.
- Ibrahim, M., & Alagidede, P. (2018). Nonlinearities in financial development–economic growth nexus: Evidence from sub-Saharan Africa. Research in International Business and Finance, 46, 95-104.
- Imamoglu, H. (2021). The role of financial development on the underground economy in regards to Europe’s 2020 strategy. Economic Systems, 45(6), 100768.
- Ito, H., & Kawai, M. (2018). Quantity and quality measures of financial development: implications for macroeconomic performance. Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, 14(5).
- Kelmanson, M. B., Kirabaeva, K., Medina, L., Mircheva, M., & Weiss, J. (2019). Explaining the shadow economy in Europe: size, causes and policy options (IMF Working papers 19/278).
- Law, S. H., & Singh, N. (2014). Does too much finance harm economic growth? Journal of Banking & Finance, 41, 36-44.
- Lo, S. B., Ramdė, F., & Diandy, I. Y. (2020). Natural Resources, Financialization and Economic Growth: Empirical Evidence in a Global Sample. The Journal of Applied Business and Economics, 22(8), 177-193.
- Luong, T. T. H., Nguyen, T. M., & Nguyen, T. A. N. (2020). Rule of law, economic growth and shadow economy in transition countries. The Journal of Asian Finance, Economics and Business, 7(4), 145-154.
- Medina, L., & Schneider, M. F. (2018). Shadow economies around the world: what did we learn over the last 20 years? International Monetary Fund.
- Nar, M. (2020). The relationship between human capital and financial development: A case study of Turkey. International Journal of Financial Research, 11(1), 157-170.
- Ngongang, E. (2015). Financial development and economic growth in Sub-Saharan Africa: A dynamic panel data analysis. European Journal of Sustainable Development, 4(2), 369-378.
- Nguyen, C. P., & Su, T. D. (2022). When ‘uncertainty’becomes ‘unknown’: influences of economic uncertainty on the shadow economy. Annals of Public and Cooperative Economics, 93(3), 677-716.
- Njangang, H., Nembot, L. N., & Ngameni, J. P. (2020). Does financial development reduce the size of the informal economy in sub-Saharan African countries? African Development Review, 32(3), 375-391.
- Nonga, F. N., Blanche, N. Y. D., & Arnaud, E. E. (2022). Financial Development and Economic Growth: An Instrumental Variables Approach. Asian Journal of Empirical Research, 12(3), 95-103.
- Puatwoe, J. T., & Piabuo, S. M. (2017). Financial sector development and economic growth: evidence from Cameroon. Financial Innovation, 3(1), 25.
- Rioja, F., & Valev, N. (2004). Does one size fit all? a reexamination of the finance and growth relationship. Journal of Development Economics, 74(2), 429-447.
- Rousseau, P. L., & Wachtel, P. (2011). What is happening to the impact of financial deepening on economic growth? Economic Inquiry, 49(1), 276-288.
- Sarwar, A., Khan, M. A., Sarwar, Z., & Khan, W. (2021). Financial development, human capital and its impact on economic growth of emerging countries. Asian Journal of Economics and Banking, 5(1), 86-100.
- Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes, and consequences. Journal of Economic Literature, 38(1), 77-114.
- Schneider, F., & Hametner, B. (2014). The shadow economy in Colombia: Size and effects on economic growth. Peace Economics, Peace Science and Public Policy, 20(2), 293-325.
- Shen, C. H., & Lee, C. C. (2006). Same financial development yet different economic growth: Why? Journal of Money, Credit and Banking, 1907-1944, 38(7).
- Svirydzenka, K. (2016). Introducing a new broad-based index of financial development. IMF Working papers, 16(05).
- Zaman, G., & Goschin, Z. (2015). Shadow economy and economic growth in Romania. Cons and pros. Procedia Economics and Finance, 22, 80-87.
-
Impact on poverty and income inequality in Malaysia’s economic growth
Rabiul Islam 
,
Ahmad Bashawir Abdul Ghani ,
Irwanshah Zainal Abidin ,
Jeya Malar Rayaiappan
doi: http://dx.doi.org/10.21511/ppm.15(1).2017.05
Problems and Perspectives in Management Volume 15, 2017 Issue #1 pp. 55-62 Views: 11272 Downloads: 5174 TO CITE АНОТАЦІЯPoverty and income inequality are extreme issues that still exist in Malaysia. Any rise in poverty and income inequality definitely affect economic growth. There are many great efforts taken by the government of Malaysia to eradicate poverty and to reduce the gap of income inequality which occurs since 1970’s. The incidence of poverty and income inequality is higher in rural areas compared to urban areas. This paper is mainly to study the level of poverty and income inequality in Malaysia together with government intervention to develop Malaysia’s economic growth. The research is focused among the working people at Ipoh, Perak. In this paper, questionnaire forms are being distributed to get information regarding the issue of poverty and income inequality. It also looks into the strategies taken by the government of Malaysia to eradicate poverty and income inequality. Few recommendations are given in terms of education policy, financial aid and assistance from government and non-government organization (NGO) to upgrade the standard and quality of living among the poor and lower-income group of people.
-
Impact of inflation on economic growth: evidence from Nigeria
Anthony Olugbenga Adaramola ,
Oluwabunmi Dada
doi: http://dx.doi.org/10.21511/imfi.17(2).2020.01
Investment Management and Financial Innovations Volume 17, 2020 Issue #2 pp. 1-13 Views: 8010 Downloads: 4880 TO CITE АНОТАЦІЯIn an attempt to examine the influence of inflation on the growth prospects of the Nigerian economy, the study employs the autoregressive distributed lag on the selected variables, i.e. real gross domestic product (GDP), inflation rate, interest rate, exchange rate, degree of economy`s openness, money supply, and government consumption expenditures for the period 1980–2018. The study findings indicate that inflation and real exchange rate exert a significant negative impact on economic growth, while interest rate and money supply indicate a positive and significant impact on economic growth. Other variables in the model depict no influence on the economic growth of Nigeria. The causality result shows the unidirectional relationships between interest rate, exchange rate, government consumption expenditures and gross domestic product. However, inflation and the degree of openness show no causal relationship with gross domestic product. As a result, the study recommends that a more pragmatic effort is needed by the monetary authorities to target the inflation vigorously to prevent its adverse effect by ensuring a tolerable rate that would stimulate the economic growth of Nigeria.
-
Formalization of the impact of imbalances in the movement of financial resources on economic growth of countries in Central and Eastern Europe
Serhiy Kozmenko ,
Maxim Korneyev
doi: http://dx.doi.org/10.21511/afc.01(1).2017.06
Accounting and Financial Control Volume 1, 2017 Issue #1 pp. 48-58 Views: 6205 Downloads: 1333 TO CITEThe article deals with the impact of financialization on economic growth in countries of Central and Eastern Europe. It determinesthe impact of imbalances in the movement of financial resources caused by financialization on economic growth of these countries. It proves that the implementation of measures aimed at increasing the openness of the economy and maintaining solvent demand have a positive impact on economic growth of the surveyed countries in the long run. It also proves the importance of developing a set of measures of strategic nature regulating imbalances in the movement of financial resources caused by financialization.
