The paper examines the relationship between financial globalization and growth. While the existing literature suggests divergent conclusions and mostly in the case of developed countries, there is a dearth of such studies in the case of developing countries, and South Asia is not an exception. Here, an attempt has been made to study the relationship between financial globalization and growth in seven South Asian countries namely Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka.  

 

Following the framework suggested by Bekaert et al. (2005) and with the help of Panel VAR and Panel causality (in GMM framework) models, the study concludes that the causation from financial globalization to growth in the region appears to be weak. Rather there appears a reverse causation running from growth to financial globalization. This suggests that it is the domestic macroeconomic policies (fiscal prudence, strong domestic financial sector and better growth policies) that act as pull factors for foreign capital. At the individual country level, the results are found to be divergent. The study finds that output growth appears to cause financial globalization in countries such as India, Pakistan, Maldives, and Nepal. However, in countries such as Sri Lanka and Bhutan, it clearly suggests that foreign capital has a significant positive impact on output growth. In Bangladesh, the impact seems to be through indirect channel, where foreign capital seems to have a disciplining impact on domestic financial markets, which in turn causes output growth. Similar indirect channel is found in the case of Sri Lanka and this is in addition to the direct channel of financial globalization causing growth.  

 

Keywords: Financial Globalisation, Economic Growth, Capital Flows, South Asia, Panel VAR

JEL Classification codes: C33, F21, F36, F65