Long-term sustainable economic growth is manifested in high rates of physical and human capital accumulation. It de- pends on the ability of the economy to mobilize financial resources, and to ensure access by people to these productive assets, which should be invested more efficiently. This process summarizes the role that financial institutions have played in financial intermediation and growth, namely to mobilize savings and allocate them to the most productive and growth-promoting activities. The core argument is that greater financial intermediation gives rise to higher productivity and thus higher national and/or per capita income. This paper examined the empirical relationship between economic growth and financial intermediation for Saudi Arabia during the last four decades (1968-2010). To this end, we adopt the autoregressive distributed lag (ARDL) methods to cointegration and the associated error correction model (ECM). Despite the minimal restrictions imposed on the functioning of the domestic financial system with a view to “fighting terrorism”, the results overwhelmingly indicate that financial intermediation has impacted negatively on long-run real GDP. These findings are attributed to two sets of factors relating to the dominance of economic activities by the public sector and the characteristics of the institutional environment surrounding the private sector, as well as to some func- tional and structural characteristics of the financial system that have impeded its development.
KeywordsLong Run GrowthFinancial IntermediationCointegrationARDL ModelError Correction Model
R. Levine, “Financial Development and Growth: Views and Agenda,” Journal of Economic Literature, Vol. 35, No. 2, 1997, pp. 688-726.
M. Thiel, “Finance and Economic Growth: A Review of Theory and the Available Evidence,” European Commission, Brussels, 2001.
P. Wachtel, “Growth and Finance: What Do We Know and How Do We Know It?” In-ternational Finance, Vol. 4, No. 3, 2001, pp. 335-362. doi:10.1111/1468-2362.00077
R. W. Goldsmith, “Finan-cial Structure and Development,” Yale University Press, New Haven, 1969.
R. I. McKinnon, “Money and Capital in Economic Development,” The Brookings Institute, Washington, 1973.
E. S. Shaw, “Financial Deepening in Economic Development,” Oxford University Press, New York, 1973.
R. King and R. Levine, “Finance and Growth: Schumpeter Might Be Right,” Quarterly Journal of Economics, Vol. 153, No. 3, 1993, pp. 717-738. doi:10.2307/2118406
R. King and R. Levine, “Finance, Entrepreneurship, and Growth: Theory and Evidence”, Journal of Monetary Economics, Vol. 32, No. 3, 1993, pp. 513-542. doi:10.1016/0304-3932(93)90028-E
J. De Gregorio and P. Guidotti, “Financial Development and Economic Growth,” World Development, Vol. 23, No. 12, 1995, pp. 433-438. doi:10.1016/0305-750X(94)00132-I
A. Lanyi and R. Sa-racoglu, “The Importance of Interest Rates in Developing Countries,” Finance and Development, Vol. 20, No. 2, 1983, pp. 20-23.
N. Roubini and X. Sala-i-Martin, “Financial Re-pression and Economic Growth,” Journal of Development Economics, Vol. 39, No. 1, 1992, pp. 5-30. doi:10.1016/0304-3878(92)90055-E
J. Greenwood and B. Jovanovic, “Financial Development, Growth, and the Distribu-tion of Income,” Journal of Political Economy, Vol. 98, No. 5, 1990, pp. 1076-1107. doi:10.1086/261720
G. Saint-Paul, “Technological Choice, Financial Markets, and Economic Development,” European Economic Review, Vol. 36, No. 4, 1992, pp. 763-781. doi:10.1016/0014-2921(92)90056-3
V. R. Bencivenga and B. D. Smith, “Financial Intermediation and Endogenous Growth,” Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 195-209. doi:10.2307/2297964
T. Jappelli and M. Pagano, “Savings, Growth and Liquidity Constraints,” Quarterly Journal of Economics, Vol. 109, 1994, pp. 83-109. doi:10.2307/2118429
M. O. Odedokun, “Alternative Econometric Approaches for Analyzing the Role of the Financial Sector in Economic Growth: Time-Series Evidence from LDCs,” Jour- nal of Development Economics, Vol. 50, No. 1, 1996, pp. 119-135.
R. Levine, N. Loayza and T. Beck, “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics, Vol. 46, No. 1, 2000, pp. 31-77. doi:10.1016/S0304-3932(00)00017-9
C. Calderon and L. Liu, “The Direction of Causality between Financial Development and Economic Growth,” Journal of Development Economics, Vol. 72, No. 1, 2003, pp. 321-334.
D. K. Christopoulos and E. G. Tsionas, “Financial Development and Economic Growth: Evidence from Panel Unit Root and Cointegration Tests,” Journal of Develop- ment Economics, Vol. 73, No. 1, 2004, pp. 55-74. doi:10.1016/j.jdeveco.2003.03.002
S. C. Valverde, R. L. del Paso and F. R. Fernández, “Banks, Financial Innovations and Regional Growth,” Working Paper No. 04-34, Department of Economics, University of Granada, Spain, 2004.
J. Z. Shan, “Does Financial Development ‘Lead’ Econo- mic Growth? A Vector Auto-Regression Appraisal,” Applied Economics, Vol. 37, No. 12, 2005, pp. 1353-1367. doi:10.1080/00036840500118762
H. Zang and Y. C. Kim, “Does Financial Development Precede Growth? Robinson and Lucas Might Be Right,” Applied Economic Letters, Vol. 14, No. 1, 2007, pp. 15- 19. doi:10.1080/13504850500425469
J. E. U. Ndebbio, “Financial Deepening, Economic Growth and De-velopment: Evidence from Selected Sub-Saharan African Countries,” AERC Research Paper 142, Nairobi, 2004.
S. Abu-Bader and A. Abu-Qarn, “Financial Development and Economic Growth: The Egyptian Experience,” Jour- nal of Policy Modeling, Vol. 30, No. 4, 2008, pp. 887-898. doi:10.1016/j.jpolmod.2007.02.001
S. E. Mohamed and M. Sidiropoulos, “Finance-Growth Nexus in Sudan: Empirical Assessment Based on an Application of the Autoregressive Distributed Lag (ARDL) Model,” Working Paper, BETA-Theme, University of Strasbourg, 2006.
A. Al-Hassan, M. Khamis and N. Oulidi, “The GCC Banking Sector: Topography and Analysis,” IMF Working Paper No. WP/10/87, International Monetary Fund, Washington DC, 2010.
Saudi Arabian Monetary Authority, Forty Sixth Annual Report, Kingdom of Saudi Arabia, Riyadh, 2010.
R. T. Ariss, R. Rezvanian and S. M. Mehdian, “Cost Efficiency, Technological Progress and Productivity Growth of Banks in GCC Countries,” International Journal of Business, Vol. 12, No. 4, 2007, pp. 471-487.
D. S. Allen and L. Ndikumana, “Financial Intermediation and Economic Growth in Southern Africa,” Federal Reserve Bank of St. Louis, Working Paper 1998-004B, 1998.
P. L. Rousseau and P. Wachtel, “Financial Intermediation and Economic Performance: Historical Evidence from Industrial Countries,” Journal of Money, Credit, and Banking, Vol. 30, No. 4, 1998, pp. 657-678. doi:10.2307/2601123
T. Beck, A. Demirguc-Kunt, R. Levine and V. Maksimovic, “Financial Structure and Economic Development: Firm, Industry, and Country Evidence,” World Bank Working Paper No. 2423, 2000.
World Bank, “Finance for Growth,” World Bank, Washington DC, 2001
R. Levine and S. Zervos, “Stock Markets, Banks, and Economic Growth,” American Economic Review, Vol. 88, No. 3, 1998, pp. 537-558.
R. Levine and D. Renelt, “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, Vol. 82, No. 4, 1992, pp. 942-963.
W. R. Easterly and S. Rebelo, “Fiscal Policy and Economic Growth: An Empirical Investigation,” Journal of Monetary Economics, Vol. 32, No. 3, 1993, pp. 417-457. doi:10.1016/0304-3932(93)90025-B
S. Fischer, “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics, Vol. 32, No. 3, 1993, pp. 485-512.
M. H. Pesaran, Y. Shin and R. J. Smith, “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, Vol. 16, No. 3, 2001, pp. 289-326. doi:10.1002/jae.616
M. H. Pesaran and Y. Shin, “An Au-toregressive Distributed Lag Modeling Approach to Cointegra-tion, Chapter 11, in Econometrics and Economic Theory in the 20th Century,” The Ragnar Frisch Centennial Symposium, Cambridge University Press, 1999.
M. H. Pesaran and R. J. Smith, “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels,” Journal of Econometrics, Vol. 68, No. 1, 1995, pp. 79- 113. doi:10.1016/0304-4076(94)01644-F
R. F. Engle and C. W. J. Granger, “Co-Integration and Error Correction: Representation, Estimation and Testing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276. doi:10.2307/1913236
S. Johansen, “Statistical Analysis of Cointegrating Vectors,” Journal of Economic Dynamics and Control, Vol. 12, No. 2-3, 1988, pp. 231-254. doi:10.1016/0165-1889(88)90041-3
S. Johansen and K. Juselius, “Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money,” Oxford Bulletin of Economics and Statistics, Vol. 52, No. 2, 1990, pp. 169-210. doi:10.1111/j.1468-0084.1990.mp52002003.x
M. H. Pe-saran and B. Pesaran, “Working with Microfit 4.0: Interactive Econometric Analysis,” Oxford University Press, Oxford, 1997.