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Can financial development enhance transparency?

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Abstract

A substantial strand of literature unambiguously established the importance of financial development for economic growth. Relatively less attention has been paid to the impact that financial development of a country can have on important development outcomes like transparency. As established by existing research, strong financial institutions in a country would imply an improved and transparent banking system, better corporate governance, ease of accessing credit, greater availability of information and best practices in investment protection. All these should theoretically promise a more transparent economic system. Our empirical findings confirm this. Using several estimation strategies, our results confirm that greater financial development enhances transparency.

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Notes

  1. Efficient financial intermediation is conducive to the investment process in a country. Effective mobilization of household and foreign savings ensures that the funds are being productively used. Financial development thus involves the establishment and expansion of institutions, instruments, and markets that support this investment and growth process. Historically the role of banks and non-bank financial intermediaries ranging from retirement funds to stock markets has been to translate household savings into investment, to monitor investments, and to price and spread risk. As summarized by Levine (2005), and Beck et al. (2009), the following five functions are listed as the overall function of a financial system and those are (1) to produce ex ante information about possible investments and allocate capital; (2) monitor investments and provide corporate governance after providing finance; (3) facilitate the trading, diversification and management of risk; (4) mobilize and pool savings; and (5) ease the exchange of goods and services.

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Authors and Affiliations

  1. Department of Economics, College of Business Administration, University of Wisconsin, La Crosse, La Crosse, WI, USA

    Nabamita Dutta

  2. Department of Economics, College of Business Administration, Kent State University, Kent, OH, USA

    Deepraj Mukherjee

Authors
  1. Nabamita Dutta
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  2. Deepraj Mukherjee
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Correspondence to Deepraj Mukherjee.

Additional information

The authors are grateful to the editor and the anonymous reviewers for their very helpful comments. The usual caveat applies.

Appendix: Components of transparency

Appendix: Components of transparency

1.1 Components of information transparency

ifs

Release of financial information index

wdi

Release of Economic and Social Information Index

bop

Release of Balance of Payments Information Index

cbt_eft

Central Bank Transparency—Economic Transparency

ipd_info

Institutional Profiles database—Quantity

sci_period

Statistical Capacity Indicator—Periodicity and timeliness

bdi

Banking Disclosure index

ipd_process

Institutional Profiles database—Process

sci_meth_source

Statistical Capacity Indicator—Source data and Statistical Methodology

cbt_proced

Central Bank Transparency—Procedural Transparency

kof

KOF Index of Globalization

radios

Radios (per 1000 population)

e_gov

E-government (UN)—web measure, infrastructure, participation

1.2 Components of accountability transparency

fhp

Freedom of the press

ciri

CIRI human rights dataset

ipd_media

Institutional Profiles Database (Media)

rsf

Reporters Sans Frontieres

msi

Media Sustainability Index

gir_media

Global Integrity Report (Media)

rfi

Release of Fiscal Information

ipd_fiscal

Institutional Profiles Database (Fiscal)

obi

Open Budget Index

irai_qbm

IDA Resource Allocation Index (Quality of Budgetary and Financial Management)

xconst

Executive Constraints

wcy

World Competitiveness Yearbook

cbt_pol

Central Bank Transparency (Political)

irai_tac

IDA Resource Allocation Index (Transparency, Accountability and Corruption in the Public Sector)

gir_govt

Global Integrity Report (Political Constraints)

gci

Global Competitiveness Index (Information on government policies)

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Dutta, N., Mukherjee, D. Can financial development enhance transparency?. Econ Change Restruct 51, 279–302 (2018). https://doi.org/10.1007/s10644-017-9205-6

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