The impact of financial institution and market development on the economic growth in BRICS

Abstract

This research investigated the causal relationship between financial development and economic growth in Brazil, Russia, India, China and South Africa (henceforth BRICS) from 1990 to 2015. Panel studies were conducted using Panel Vector Error Correction (VEC) Modelling and Granger causality tests. The research found that bank development exhibited bidirectional causality, which transitioned to reverse causality from 1995 to 2015. Bond and stock market development exhibited unidirectional Granger causality with economic growth. Private debt issued through bond markets was consistently shown to Granger cause economic growth, unlike private credit issued by banks. On the basis these research findings, it is recommended that BRICS member states control the level and growth of private credit. Failure to do so could give rise to speculation, asset bubbles, financial crises and recessions. More critically, BRICS should promote the development of financial markets, especially bond markets, which would promote private debt as a productive alternative to the private credit issued by banks. Keywords: financial development, economic growth, BRICS, panel VECM, Granger causality