FINANCE AND GROWTH : EVIDENCE FROM THE ASIAN FOUR LITTLE DRAGONS

Abstract

Despite the recent interest in the relationship between finance and growth, there has been no empirical study on this relationship for the Asian four dragons, Singapore, Hong Kong, Taiwan and Korea, although they have achieved spectacular growth over the past decades. However, the author believes that financial development may play a particularly important role in their economic development. In addition, the relationship between finance and growth tends to be quite complex, and differences in economic policies and financial structures may affect this relationship and the contribution of finance to growth. However, the recent literature typically focused on cross-country studies involving a large number of countries, and hence these studies are unable to account for this complexity. As a result, this paper attempts to fill in the gap in the recent literature by examining this relationship for the Asian dragons. In addition, the paper will also look at the possible impact of economic policies and the structures of financial systems on the relationship for the Asian dragons. Recognising the complexity of the relationship between finance and growth is crucial for policy formulation for future development of the financial sector and its effective contribution to growth in individual countries. Time-series and cointegration techniques were used to test this relationship in the case studies of Singapore and Hong Kong to account for the influence of annual fluctuations which are usually neglected in averaged data used in some of the recent cross-country studies. In addition, a pooled cross-section time-series study for the Asian four dragons is conducted, which alleviates the problem posed by averaged data used in pure cross-section studies. Generally, the results obtained indicate a strong positive relationship between finance and growth in these countries, and confirms the fact that financial development may be particularly important to the growth of these countries, and its contribution to growth can be enhanced and maximised through the adoption of suitable economic policies and financial structures for each country.