United Nations Development Program, Human Development Report 2005, International Cooperation at a Crossroads: Aid, Trade and Security in an Unequal World

Considering the importance of foreign direct investment (FDI) inflows for the sustainable economic advancement of a host country, this paper investigates the financial development and FDI nexus, using institutional quality as a moderator. The sample consists of 79 Belt and Road Initiative (BRI) partner countries, as these countries are entering a new age of integration, foreign trade, and mutual development. The empirical findings of conventional and robust estimators show that the financial development of BRI host countries significantly attracts FDI, while the institutional quality plays a significant moderating role in this relation. The in-depth analysis offers the insight that financial markets are less attractive to FDI relative to financial institutions. Thus, policymakers are advised to uphold sound financial institutions to make the country more attractive to overseas investors, while concentration on financial markets may multiply the benefits of FDI. The results are robust to alternative proxies of the key variables and alternative methodologies.

Financial Development and Foreign Direct Investment—The Moderating Role of Quality Institutions

Reinforcing poverty alleviation efficiency through technological innovation, globalization, and financial development

This study used principal component analysis (PCA) to develop composite indexes for economic growth, environmental degradation, and social well-being. The mutual relationship between these indexes was empirically tested using a panel vector autoregressive model based on a generalized method of moment approach (PVAR-GMM), and robustness was determined with Driscoll and Kraay regression. To this end, we gathered the data for 36 Belt and Road Initiative (BRI) countries over the period 1995-2016. Using a multivariate framework, the empirical results showed that environmental degradation and social well-being have a significant positive impact on the economic growth index. The social well-being index and economic growth are contributors to environmental degradation. Similarly, economic growth, in the long run, improves social well-being. The results confirm bidirectional causality between economic growth and environmental degradation. Another bidirectional causal relationship was found between economic growth and social well-being. Further, causality exists from social well-being to environmental degradation, but not vice versa. The analysis of the impulse response function exhibited the presence of the environmental Kuznets curve phenomenon in BRI countries. Moreover, the results of variance decomposition suggested that a shock in one index spills over to other indexes simultaneously. The study suggests that policymakers should consider social well-being and environmental degradation in economic activity to achieve sustainable development goals.

The empirical relationship between environmental degradation, economic growth, and social well-being in Belt and Road Initiative countries.

Financial development may affect poverty directly and indirectly through its impact on income inequality, economic growth, and financial instability. Previous studies do not consider all these channels simultaneously. To proxy financial development, we use the ratio of private credit to GDP or an IMF composite measure. Our preferred measure for poverty is the poverty gap, i.e. the shortfall from the poverty line. Our fixed effects estimation results for an unbalanced panel of 84 countries over the 1975–2014 period suggest that financial development does not have a direct effect on the poverty gap. However, as financial development leads to greater inequality, which, in turn, results in more poverty, financial development has an indirect effect on poverty through this transmission channel. Only if we use poverty lines of $3.20 or $5.50 (instead of $1.90 a day as in our baseline model) to define the poverty gap, we find that economic growth reduces poverty. This implies that in those cases the overall effect of financial development on poverty may be positive or negative, depending on which indirect effect, i.e. that of income inequality or growth, is stronger. Financial instability does not seem to affect the poverty gap. These results are consistent across various robustness checks.

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Does Financial Development Reduce the Poverty Gap

This paper tests the relationship between financial development, quality of institutions and poverty. To this end, we reviewed the literature and selected indicators of poverty, financial development and quality of institutions. Empirically, we used the three-stage least squares method to examine a sample of 132 countries observed over the 1980–2014 period. First, we proved that financial development does not improve the situation of the poor, while the effect of institution quality on poverty and financial development depends on the choice of indicators. Our robustness analysis pointed to the sensitivity of our results to the different financial development, quality of institutions and poverty indicators.

Financial Development, Institutional Quality and Poverty Reduction: Worldwide Evidence

The aim of this paper is to test the relationship between financial development (FD), political institutions (PI), income inequalities (II), and poverty. We tested this relationship using different estimation methods and two separate samples. The first sample consists of a panel of 93 democratic countries and the second includes a panel of 31 autocratic countries. Results indicate that, unlike in autocratic countries, FD and democratic institutions, taken separately, help to bridge the gap between the rich and the poor by reducing poverty in democratic countries. To the contrary of autocratic countries, the interaction between FD and PI, strangely enough, does not reduce II and poverty in democratic countries. Analysis of the sub-democratic group yields opposite results, particularly in low-, mid-, and upper-mid-income countries compared with high-income countries.

Financial Development, Income Inequality, and Poverty Reduction: Democratic Versus Autocratic Countries

Purpose




The purpose of this paper is to test the impact of financial development (FD) indicators, namely banking and stock market (SM) indicators, on the household final consumption expenditure as a poverty index.




Design/methodology/approach




The authors study an international sample of 138 countries over the period 1980-2014. A series of estimation methods are used on different measures of bank-based and stock-based FD. Subgroups of countries, namely low, middle, upper-middle and high-income countries are also investigated.




Findings




In the study, the authors concluded that FD fails to reach the poorest segments of each society in the international sample. For the selected subgroups of countries, the authors concluded that the impact of the bank and the SM indicators, on the poorest population segments, changes depending on, the estimated FD variables, the selected group of countries and the adopted estimation technique.




Practical implications




The present study recommends appropriate economic and financial reforms, with focus on the roles of banks and SM roles to reduce poverty and stimulate channels that allow the poorest population to exploit from financial services.




Originality/value




This paper is the first of its kind to empirically examine, separately, the impact of banks development and SM development, on an international panel and subgroups of countries, using modern econometric techniques.

Re-examining the financial development and poverty nexus: some international evidence

This paper examines the impact of financial development on poverty in middle-income countries. To that end, we made recourse to several estimation techniques over a study period stretching from 1980 to 2014. The results indicate that development of the banking system does not necessarily improve the poor’s conditions. However, development of the stock market does. Through a sensitivity analysis, we concluded that our banking index is sensitive to the use of the poverty index, while our stock market index is sensitive to the choice of the middle-income vs. high income studied countries.

Sami Mensi

Papers

Financial Development, Institutional Quality and Poverty Reduction: Worldwide Evidence

Financial Development, Income Inequality, and Poverty Reduction: Democratic Versus Autocratic Countries

Re-examining the financial development and poverty nexus: some international evidence

Financial Development and Poverty Reduction: A Study of Middle-Income Countries