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International Business Management
Year: 2017  |  Volume: 11  |  Issue: 6  |  Page No.: 1289 - 1297

The Impact of Financial Liberalization on Economic Growth: The Indirect Link

Chadi Azmeh, Hazem Al Samman and Sulaiman Mouselli    

Abstract: This study investigates the impact of financial liberalization on economic growth through its effect on the size and activity of the financial sector in a set of developing countries. We use the relative number and share of Foreign banks as proxies for financial liberalization and liquid liabilities and claims on private sector as share of GDP as proxies for the financial development. We find a negative real effect of the level of Foreign banks entry on the size and activity of financial development. However, the effect of financial development on economic growth is positive. This result contradicts the first component of Levine’s theory that Foreign bank’s entry has positive effect on financial development but confirms the second component that financial development has positive effect on economic growth. Our result is also consistent with Ghosh who finds that a greater banking sector openness reduces economic growth in developing countries.

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