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Does economic growth depend on the financial sector or vice versa?
12 Aug 2022

Does economic growth depend on the financial sector or vice versa?

    Experts from the Institute for Forecasting and Macroeconomic Research (IPMI) analyzed the relationship between financial sector development and economic growth in Central Asian countries.

    The purpose of this study was to identify what relationship prevails between the two sectors in the Central Asian countries:

    Does an increase in the supply of services in the financial sector lead to economic growth, or will economic growth lead to the development of the financial sector, creating additional demand for financial services?

   The vector of the relationship between the development of the financial sector and economic growth in the countries of the world took place in different ways. For example, in Scotland, Belgium, Russia and Japan, the development of the financial sector contributed to the acceleration of industrialization, while in England, Germany and France, the development of industry led to the growth of the financial sector.

   As a result of a study conducted on the example of the countries of Central Asia, it was found:

   The development of the financial sector is not a result, but a factor of economic growth. Thus, the growth in the development of the financial sector by 1 p.p. will lead to the growth of the economy of the Central Asian countries by 0.5-2.5%.

   The relationship between the development of the financial sector and economic growth is one-sided. In other words, loans provided by banks lead to economic growth, but there is no inverse relationship. This is due to the insufficient level of development of the financial market, the lack of the necessary tools for reinvesting funds, as well as the low level of attracting savings to the financial sector.

   At the same time, it is worth considering the fact that if at the initial stage of development of the countries of Central Asia the financial sector served as the basis for economic growth, then at the next stage, further development of the financial sector is necessary to have an impact on economic growth.

    The development of the financial sector requires the development of financial inclusiveness. At the same time, it has been proved that there is a two-way relationship between financial inclusiveness and the development of the financial sector.

    Based on the results of the study, the following proposals have been developed:

   In Uzbekistan, first of all, attention should be paid to the development of the financial market, and after the value of GDP per capita reaches a certain value (US$2,800), mechanisms for attracting savings to the financial sector should be developed.

   In addition to the development of the financial market, it is necessary to increase the number of financial instruments and create investment banks that bring profit in accordance with the level of risk. As a result, free funds can be redirected to the formal financial sector.

https://uzdaily.uz/en/post/74864

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