The Effects of Financial Development on Asian Economic Growth

Levine (1999) used legal origin variable as instrument to solve the endogeneity problem in regression of growth rate on financial development. We apply this approach to Asian countries, whose colonial origins are similar to legal origin in Levine’s data. Some authors used the variables measuring financial developments: stock market liquidity, bank credit, and the share of external financing, etc. In this study, we use Levine et al. (2000)’s data set and total market capitalization value of stocks for showing the degree of development in financial sector. Also, we use the legal (colonial) origin, like La Porta et al. (1998) who analyzed the effect of the difference in common law vs. civil law tradition. We can see that legal origins that were implanted in Asian countries show significant effect on growth through the development in financial sector and implementation of physical investment. In special, French civil law countries have lower degree of financial development.