UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM-NETHERLANDS PROGRAMME FOR MASTER IN DEVELOPMENT ECONOMICS THE RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND HOUSEHOLD WELFARE: CASE STUDY IN FIVE ASIAN COUNTRIES By PHAN THI KHANH VAN This paper was submitted in partial fulfillment of the requirements for Master’s degree in Development Economics Ho Chi Minh City, July 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM-NETHERLANDS PROGRAMME FOR MASTER IN DEVELOPMENT ECONOMICS THE RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND HOUSEHOLD WELFARE: CASE STUDY IN FIVE ASIAN COUNTRIES By PHAN THI KHANH VAN Academic supervisor Dr. DUONG NHU HUNG Thispaper was submitted in partial fulfillment of the requirements for Master’s degree in Development Economics Ho Chi Minh City, July 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONTENTS ACKNOWLEDGEMENT. v LIST OF FIGURES. vi LIST OF TABLES.
vi CHAPTER I: INTRODUCTION. Justification of the study. Scope of the study. Structure of the study.
4 CHAPTER II: LITERATURE REVIEW. Definitions of key concepts. Household welfare and Poverty. 9 CHAPTER III: ECONOMETRICS REVIEW.
Stochastic Process, Stationarity and Random Walks. Unit Root Test. Granger Causality Test. Panel Unit Root Test.
16 [i] LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Instrumental Variables Regression (IV). Generalized method of moments (GMM). 19 CHAPTER IV: DATA AND RESEARCH METHODOLOGY.
23 CHAPTER V: ANALYSIS RESULTS. 31 CHAPTER VI: CONCLUSIONS AND POLICY IMPLICATIONS. Limitations and directions for further studies. Directions for further studies.
a Appendix 1: Description of FD and PR variables (1998-2011). a Appendix 2: Panel Unit Root Test of variables. b Appendix 3: Pedroni Cointegration Test. m [ii] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT The study would be done successfully thank to the beautiful assistance and guidance of everybody who are always with me during the research period.
First, I would like to express my deepest appreciation to The Board of Management and Theoretical Supervision of this program. In fact, I would like to send sincere thanks to Dr. Nguyen Trong Hoai, Dr. Pham Khanh Nam who give me a very first step guidance doing this study (theoretical review and techniques understanding) and give me a piece of advice when I got in stuck with my study.
Besides that, I also thank to Dr. Duong Dang Thuy, who has given me theoretical advice and introduced me to Dr. Le Van Chon for intensive support. Moreover, I would like to express my gratitude to Dr.
Le Van Chon and Dr. Phung Thanh Binh who supported my study and my mind when I lost inspiration during research period. Not only the teaching staff but also the class MDE 17 classmates are those I really appreciate. Thanks to their care, their understanding and their sharing, I know exactly what I should do.
The more importantly, I would like to express my appreciation to my direct supervisor Dr. Duong Nhu Hung. He is a very kind teacher who always cares me and encourages me during the research period. He is kind to me with his scientific guidance, soft but invaluable advice till the final stage of the study.
Last but not least, during the time doing this study, I encountered both mental and fiscal problems. At that time, my family, especially my mother, my grandmother and my aunts who always advise me to try my best and give me spiritual assistance. I also send my sincere thanks to my husband who is always with me. I am proud of his patience and his sympathy.
He has given me a chance to concentrate on my studying instead of housework. [iii] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT The study presents the empirical result of the relationship between financial development and household welfare, which has been the hotly debated issue recently. To detect the nexus of financial development and household welfare, the Pedroni cointegration test is run to find out the long-run relationship between financial development and household welfare. In empirical study, it is affirmed that there exists the long-run relationship between financial development and household welfare.
However, the impact of financial development on household welfare cannot be shown through Pedroni cointegration test. Thus, 2SLS GMM is deployed to identify the impact of financial development on household welfare. Keywords: financial development, household welfare, cointegration, two stage least squares, [iv] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATION 2SLS: Two Stage Least Squares ADF: Augmented Dickey Fuller ADRL: Autoregressive Distributed Lag Model AIC: Akaike information criterion AR: Auto-regressive DCBS: Domestic credit provided by banking sector as a percentage of GDP DCP/GDP: Domestic credit to the private sector as a ratio of gross domestic product DCPS: Domestic credit to the private sector as a percentage of GDP DF: Dickey Fuller DMBA: Domestic money bank assets EG: Economic growth FD: Financial development GDP: Gross Domestic Product GMM: Generalized method of moments HLSS: Household Living Standards Survey IMF: International Monetary Fund IV: Instrumental Variable M2/GDP: money and quasi money as percentage of GDP M3: the broadest definition of money OECD: Organization for Economic Co-operation and Development OLS: Ordinary Least Square PP: Phillips-Perron PR: Poverty reduction SBC: Schwarz’s Bayesian criterion SME: Small, medium-sized enterprise VAR: Vector Auto-regressive VECM: Vector Error Correction Model WB: World Bank WDI: World Development Indicator WEF: World Economic Forum [v] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1: Money and quasi money (M2) as percentage of GDP. 2 Figure 2: Household per capita consumption (constant 2000 US$).
3 Figure 3: Financial Sector Development and Poverty Reduction. 6 Figure 4: Line graph of proxies of FD and household welfare from 1960 to 2011in five Asian countries. 28 Figure 5: Relationship between FD and per capita consumption in five Asian countries (1960- 2011). 30 LIST OF TABLES Table 1: Empirical studies about the causal nexus of FD and PR.
10 Table 2: Proxy variables. 23 Table 3: Description of FD and household welfare variables (1960-2011). 27 Table 4: t-statistics panel unit root tests. 32 Table 5: t-statistics panel unit root test: Variables at the first difference.
32 Table 6: Pedroni cointegration tests: Variables from 1960 to 2011. 33 Table 7: Pedroni cointegration tests: Variables from 1998 to 2011. 33 Table 8: Two stage least squares estimator between FD and PR. 34 [vi] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER I: INTRODUCTION 1.
Problem statement It is undeniable that the relationship between financial development (FD) and economic growth (EG) has been one of the most attractive areas of research in the field of economic development over recent decades. Some related studies have been employed, yet this relation remains controversial issues. In fact, there have been some conflicts on the relationship between finance and growth in earlier literature. In fact, Robinson (1952) and Lucas (1988) dismiss the role of finance in understanding EG while McKinnon (1973) and Miller (1988) insist on this relation between FD and EG.
In recent researches, the harmony of vital roles of finance in enhancing growth has been reached. For example, Kirkpatrik (2000) states that good financial system that mobilizes savings and allocates resources to more productivity contributes to growth by supporting capital accumulation, promoting investment efficiency, and improving technology. Furthermore, many people believe that EG reduces absolute poverty because the more growth the economy reaches, the more jobs would be generated for the poor or the fewer differentials in wage between the skilled and unskilled labor at a later stage of development (Galor and Tsiddon, 1996) benefits the poor. Then, a consensus emerged recently is that EG overall leads to poverty reduction (PR) through the improvement of household welfare.
However, these close relationships between FD and EG or between EG and household welfare do not mean that FD contributes to PR (Beck et al, 2007) through the improvement of household’s welfare. The explanation follows that the goal of EG in most developing countries is linked with both PR and income distribution. In other words, if FD stimulates EG by increasing income of the rich, which results in worsening income equality, FD will not benefit the poor. This debate appeals many researchers to conduct studies on relationship between FD and household welfare.
In addition, this paper aims to examine the relationship between FD and household welfare in five Asian countries including Indonesia, Malaysia, Philippines, Thailand, and Vietnam. The reason why the research focuses on a set of these five Asian countries is that there is little research on FD and PR in Asia. Due to the limit of short time series data, the research will identify the relationship between FD and PR in panel data, especially panel five Asian countries with the assumption that these countries are nearly at the same foundation of development. [1] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In the context of these countries including Vietnam, it can be seen that finance sector has a rapid development in both quantity and quality, especially in the global economy.
According to Odhiambo (2008), the ratio M2/GDP indicates the real size of financial sector of a developing country. Figure 1 provides some statistics of financial depth of five Asian countries in the period 1990-2010. Most of them (except Indonesia which has a slightly decrease in M2/GDP and Philippines which is nearly stable) have an increase in finance sector. In fact, the slightly increasing financial sector in such three countries – Malaysia and Thailand – has been seen while it is noted that Vietnam is the country, which has a dramatic improvement in financial sector, particularly the ratio M2/GDP has been moving from around 21 percent in 1992 to nearly 110 percent in 2011.
M2/GDP (%) 160 140 120 100 Indonesia Malaysia 80 Philippines 60 Thailand Vietnam 40 20 0 Year Figure 1: Money and quasi money (M2) as percentage of GDP (Source: World Development Indicator – World Bank) Moreover, household consumption per capita in five Asian countries has also gained as the illustration of figure 2. In detail, only in Malaysia, it can be seen the dramatic increase in household welfare which is expressed by the per capita consumption from around 1,800 US$ in 1997 to 2,800 US$ in 2011 even though there is a steep reduction to over 1,500 US$ in 1998. It reaches nearly to the double in per capita consumption. Similarly, household per [2] LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com capita consumption in four countries is increasing.
The slope of this line is not so steep as Malaysia’s. In sum, it can be seen that finance sector improves, household per capita consumption increases. Hence, the household welfare can be said to be improved. In other words, FD and household welfare have a positive relationship.
3500 Household per capita consumption 3000 Indonesia 2500 Malaysia (constant 2000 US$) Philippines 2000 Thailand Vietnam 1500 1000 500 0 Year Figure 2: Household per capita consumption (constant 2000 US$) (Source: World Development Indicator – World Bank) Thus, it is suggested to raise the question of whether a well-functioning financial system will help to enhance the welfare of household or not. For answering this question, as well as providing policy implications, the paper particularly focus on investigating the causal relationship between FD and household welfare in the five Asian countries. Research objectives In the paper, the specific research objectives are to: i. To examine whether there is any relationship between FD and household welfare in these five Asian countries.
How does FD affect household welfare? [3] LUAN VAN CHAT LUONG download : add luanvanchat@agmail. To draw some policy implications in order to help authorities have a general view and then propose some necessary/appropriate interventions.