Chapter financial improvement and but also trade reform can

Chapter
Two

Literature
Review

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Not only the authors observe the
impact of financial development and ICT expansion on economic growth but also
they observe the causality among them. Aside the authors found causal relationship
between financial development and ICT elevation going through the existing
literature. To show the relationship amid financial development, ICT
development and economic growth, the author has presented some literature
review on this issue below:

2.1 Relationship between Financial Development and
Economic Growth

Developing
countries cannot utilize the technology due to financial hurdle and cannot get
the complete benefit from them. As a result these countries are lagging behind
in production as their developed counterpart (Aghion et al., 2005). Developing
nations whose financial system is low standard, fall into a vicious circle
where lack of financial development is responsible for low economic growth and
vice versa (Fung, 2009). In opposite to the countries whose financial system is
well-organized, there is evidence that their economic growth is higher.
Financial advancement helps the poor people in the country to keep pace with
the growing economy (Demirguc-Kunt and Levine, 2009; Baltagi et al., 2009).
Financial development is a crucial factor in case long run economic growth such
as capital accumulation, proper allocation of resources and technological
advancement (Levine, 2005). Blackburn and Hung (1998) examines that not only
financial improvement and but also trade reform can increase fiscal progress.
Lucas (1988) takes an opposition against the relationship between financial
development and economic growth that they can function independently and there
is no dependence on each other. This is termed as impartial proposition.

Strict
trade barriers and financial hurdle are the dominant factors that are
responsible for low economic growth in African Countries ( Beck et al., 2011;
Ndulu et al.,2007). In these countries the government intervention in financial
sector is so much that is why all the decisions made in this sector is related
with political matter. Now and then there is not at all monetary sustainability
(Honahan and Beck, 2008; Ncube, 2007). Ostry et al. (2008) have found that
financial systems with no government intervention contribute in financial
development that those with government intervention. Now the common question is
that whether the financial development is responsible for economic growth or
economic growth is responsible for financial development or the growth of these
two are relevant with each other.

If
the financial development is a key diver of economic growth, it is called
‘supply leading’ hypothesis. In other words, financial development leads to
economic growth. It helps to enhance economic growth by increasing savings,
capital accumulation etc (King and Levine, 1993). According to this hypothesis,
lack of financial institutions indicates that there is less need for financial
services such as savings, capital accumulation which lead to low economic performance.
In opposite to these hypothesis, there is another hypothesis called ‘demand
following’ hypothesis. The main proposition of this hypothesis is that economic
growth is a key driver of financial development. In other words, economic
growth leads to financial development (Robinson, 1952). The author has meant
that if the economy grows, there will create more demand for financial
services. As a result of this increasing demand, more financial institutions
will be established and therefore financial services will be developed.

Shan
(2005) presents some empirical evidence on Asian countries regarding the impact
of financial development on economic growth. The author has found that the
countries like China, Japan and Korea has no impact of financial sector on
economic sector. He has some doubt on the claim that financial development has
an essential role in economic development when he worked on some Asian
countries during their financial crisis. Blackburn and Hung (1998); Blackburn
et al., (2005) argue that there is another hypothesis which shows the
bi-directional relationship between financial development and economic growth.
In other words, there exists causal relationship between them which clarifies
that not only the financial development can enhance economic growth but also
economic growth can enhance financial development. They act as complementary of
each other. Financial development is a role playing factor of economic growth
and economic growth needs a well-systematic-planned and organized financial
system. This hypothesis is named as ‘feedback’ hypothesis. Some economists like
Gregorio and Guidotti (1995) tells about the ‘neutrality’ hypothesis where
there is no relationship between financial development and economic growth.
They are independent sector and don’t give support to each other.