Analyzing the relationship between financial development and economic growth in Asia: do human capital and institutional quality matter?

Abstract

In recent years, the Asian economic landscape simmers with a complex brew of challenges – inflationary storms whipped by global interest rate hikes, price instability due to some conflicts in the region, and lingering tremors from COVID-19's economic earthquake. Amidst this turbulence, this research investigates the intricate relationship between financial development and economic growth across 46 Asian nations from 2013 to 2022 by employing the Two-step system GMM method. The results show that financial development has a positive impact on economic growth. Moreover, the study delves deeper, uncovering the critical moderating role of human capital, measured by educational enrollment, and institutional quality, reflected in governance effectiveness. These factors act as catalysts, amplifying the positive impact of financial development on sustainable economic growth. Besides, this intricate interplay is further explored by examining the impact of population, inflation, foreign investment, trade openness, and labor participation, providing a holistic understanding of the forces shaping Asian economies. Ultimately, this research aims to illuminate a path in the direction of a brighter future for Asia, characterized by shared prosperity, equitable growth, and resilience in the face of future challenges. From the research result, this study provides recommendations mainly focusing on developing financial systems, education reform, and strengthened governance. By empowering policymakers with actionable insights, it seeks to unlock the full potential of Asia's economic growth, shifting the region closer to a more prosperous and stable tomorrow.