Is the Link Between the Real and Financial Sectors Affected by Mechanism of Governance? A Cross-Country Analysis in Asia

Abstract

In the post modern economic thinking, the real and financial sectors of an economy are found to be interlinked. The magnitude of such a linkage between the real and financial sectors can further be fuelled by the mechanisms of governance of an economy. It is expected that good governance always works as a catalyst for an economy to grow and develop in different aspects. The present study tries to examine how do the World Bank governance indicators influence or get influenced by the chain of interplays between the real and financial sectors measured by the domestic credit to GDP ratio (CGDP) in some selected Asian economies for the period 1997–2014. The results show that, in most cases, there is no such interplay between themselves. The countries where some sorts of causations are observed, like that in India, Japan, Indonesia, Malaysia, governance indicators work a little. In most cases, the demand side approach, that is the CGDP ratios, work as the catalyst to the ways of governing of the selected economies, works significantly. On the other hand, the countries like S. Korea and Bangladesh do not experience any sort of causation; governance indicators do not work at all for them. So, the World Bank generated governance indicators is not general, rather partial in affecting the credit to GDP ratio of the countries.