UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FINANCIAL DEVELOPEMNT AND ECONOMIC GROWTH IN TEN ASIAN COUNTRIES BY DUONG DINH TRIEU MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2013 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FINANCIAL DEVELOPEMNT AND ECONOMIC GROWTH IN TEN ASIAN COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By DUONG DINH TRIEU Academic Supervisor: TRUONG DANG THUY HO CHI MINH CITY, DECEMBER 2013 TABLE OF CONTENTS ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Problem statement .2 1.2 Research questions 1.3 Objectives of the study 1.4 Scope of the research 1.5 Structure of the thesis CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND 2.1 Theoretical background 2.2 Empirical review .14 CHAPTER 3: RESEARCH METHODOLOGY 19 3.1 The conceptual framework 19 3.2 Variables 20 3.2.1 Dependent variable .20 3.2.2 Explanatory variables 21 3.3 Econometric model 23 3.4 Data and Descriptive Statistics 26 3.5 Correlation among independent variables 27 CHAPTER 4: RESEACH FINDINGS .29 4.1 Test for Multicollinearity 39 4.2 Testing for Heteroskedasticity 40 4.3 Testing for Autocorrelation .41 4.4 Panel Unit Root Test 42 CHAPTER 5: CONCLUDING OBSERVATION AND POLICY IMPLICATION 44 5.1 Main findings and policy implications .44 5.2 Limitation of the research and recommendation for further studies 48 REFERENCES 50 APPENDIX 1: List of Economies and Number of Observations 54 APPENDIX 2: Definition of Variables and Their Data Sources 55 LIST OF FIGURES Figure 1: GDP growth rate and Inflation rate in Vietnam (1996-2012) Figure 2: Stock market capitalization (% GDP) and Inflation rate in Vietnam (19962012) Figure 3: Asian Countries Recovery after the crisis in 1997 Figure 4: Relation between Financial Development and Economic Growth LIST OF TABLES Table 1: Descriptive Statistic on the sample observations 26 Table 2: Correlation Matrix 28 Table 3: Regression results: Fixed Effects Model and Random Effects Model Table 4: Hausman test result between Fixed Effects Model and Random 30-31 33 Effects Model Table 5: Regression result of the optimal Fixed Effects model 34-35 Table 6: Collinearity Diagnostics 39-40 Table 7: Result of Test for autocorrelation Table 8: Panel Unit Root Test Results 41 42-43 ABBREVIATIONS INF : Inflation Rate IMF : International Monetary Funds WB : World Bank WDI : World Development Indicators INT : Interest Rate GDP : Gross Domestic Products OLS : Ordinary least square FEM : Fixed Effects Model REM : Random Effects Model X : Import M : Export ABSTRACT Financial-sector-derived economic crises happened recently in Asia area and in Vietnam create a question about the growth-promoting role of financial system against the economy After reviewing the theory of growth-finance nexus and many empirical studies about the link between financial development and economic growth, this paper is implemented to examine whether financial development really promotes economic growth in Asia including Vietnam and its nine neighboring nations Collecting data of ten Asian countries over period from 1980 to 2012 from IMF and World Bank and using econometric analysis method are the tools used in this report Due to the inadequate data of Vietnam before 1986 and of some other developing countries, the analyzed data is unbalance panel form GDP per capita growth is proxy for economic growth which is dependent variable in the regression model The indicators for financial development which is the main studied object in this paper include the ratio of private credit to GDP, the efficiency of financial institutions measured the spread between saving rate and lending rate, capital inflows as share of GDP and the ratio of total market value of all listed companies to GDP Besides, the regression model is added some control independent variables consist of the inflation rate measures the less stability of economies, and the two variables whose values measured in percentage against GDP: ratio of foreign trade to GDP and expenditure of Governments divided by GDP The regression result of Fixed Effects model affirms all four indicators of financial development promote economic growth The private credit is significantly necessary for growth The relationship between private credit ratio and economic growth is quadratic The increase in stock market capitalization leads to increase in investment in turn fosters growth While financial openness promotes economic growth significantly Lastly, the narrow of spread between lending and saving rates lowers the cost of investment so investment increases, in turn economic growth is accelerated Page Page CHAPTER 1: INTRODUCTION 1.1 Problem statement Vietnamese economy has been continuously developing at a high rate since the beginning of 90s One of many reasons may be the economy opening policy of Vietnam Government including the policy of liberalizing the financial system gradually The expanding of Vietnamese financial system with the evidence of the increasing in quantity of domestic joint stock banks and the appearance of many foreign commercial banks, financial companies and insurance institutions They help economic components especially private enterprises and households to access easily to financial resources Besides, the Vietnamese securities market which has been established in 2000 plays a more and more important role in the economy It operates as the second fund mobilization channel of enterprises The domestic stock market, one component of securities market, has been rapidly developing in term of the market value of listed companies The ratio of Vietnamese market capitalization of listed companies to GDP increased from 0.87% in 2005 to 27.52% in 2007 (WDI) However, the volatility of Vietnam economy recently such as the high domestic inflation rate from 2007 and the crash of the stock market in 2008 have restrained the growth rate Some causes are raised to explain the volatility, they include the rapidly over expanding of Vietnamese banking system and the easy credit provision of domestic commercial banks The average GDP growth rate of Vietnam is 7.42% in the low inflation rate period of 4.74% from 1996 to 2007 However, from 2008 to 2012 the growth rate reduced and only reached an average level of 5.88% because Vietnam suffered a high average inflation rate of 13.36% in this period On the other hand, the economic volatility also affects heavily on the stock market of Vietnam In 2008, when the inflation rate speeded up at the number of 23.12% from the rate of 8.35% in the previous year, the ratio of market capitalization to GDP declined sharply at 10.53% from the rate 27.52% of 2007 Therefore, what is the cause makes inflation rate be REFERENCES Adams, C (2008) Emerging East Asian Banking Systems Ten Years after the 1997/1998 Crisis Working Paper Series on Regional Economic Integration No 16, Asian Development Bank, Manila Andrew Berg and Anne Krueger (2003) Trade, Growth, and Poverty: A Selective Survey Anh Tuan Tran (2008) Financial development and economic growth in the case of Vietnam, La Trobe University-Melbourne, Victoria, Australia Barro, R., and J.-W Lee (2010) A New Data Set of Educational Attainment in the World, 1950–2010 NBER Working Paper No 15902, National Bureau of Economic Research, Cambridge Beck, T., and A Demirgỹỗ-Kunt (2009) Financial Institutions and Markets Across Countries and over Time: Data and Analysis World Bank Policy Research Working Paper No 4943, Washington, DC Bencivenga, V B Smith (1991) Financial Intermediation and Endogenous Growth Bencivenga, V B Smith, and R Starr (1996) “Equity Markets, Transaction Costs, and Capital Accumulation: An Illustration.” World Bank 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Against Economic Development APPENDIX 1: List of Economies and Number of Observations Number of Observations Economy GDP per Capita Growth Rate Credit to Stock Market Interest Trade Private Capitalization Rate Openness Sector Ratio Ratio Spread Ratio Inflation Rate Government Capital Expenditure Inflow Ratio Ratio Vietnam 28 21 13 27 27 17 24 17 Thailand 33 33 31 33 33 33 33 33 33 33 24 33 33 33 33 33 Korea Republic Philippines 33 33 25 33 33 33 33 33 China 33 33 22 33 33 26 33 31 Indonesia 33 33 25 33 33 33 33 32 Malaysia 33 33 25 33 33 33 33 33 Singapore 33 33 25 33 33 33 33 33 Japan 33 33 25 33 33 33 33 33 33 25 25 33 33 31 33 25 10 Hong Kong Page 54 APPENDIX 2: Definition of Variables and Their Data Sources Variable Definition Data Source GDPCapGrowth GDP per capita growth (annual %) World Bank, World Development Indicators online database PriCredit Domestic credit to private sector refers to World Bank, World financial resources provided to the private Development sector, such as through loans, purchases of Indicators online non-equity securities, and trade credits and database other accounts receivable, that establish a claim for repayment For some countries these claims include credit to public enterprises (% of GDP) StockCap Market capitalization of listed companies World Bank, World (% of GDP) Development Indicators online database IntSpread Interest rate spread (lending rate minus World Bank, World deposit rate, %) Development Indicators online database TradeOpenness The sum of exports and imports of goods and ser Page 55 vices measured as a share of gross World Bank, World domestic product (% of GDP) Development Indicators online Page 56 database INF Inflation, consumer prices (annual %) World Bank, World Development Indicators online database GovExp General government final consumption World Bank, World expenditure (% of GDP) Development Indicators online database CapInf Private capital flows consist of net foreign World Bank, World direct investment and portfolio Development investment Foreign direct investment is Indicators online net inflows of investment to acquire a database lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments The FDI included here is total net, that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world Portfolio investment excludes liabilities constituting foreign authorities' reserves and covers transactions in equity securities and debt securities (% of GDP) GDP = gross domestic product