Financial development and regional economic growth :: Panel data evidence from Indonesia

SIREGAR, Leidra Darman Pandapotan, Dr. Yonosuke Hara

2009 | Tesis | S2 Magister Ekonomika Pembangunan

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This paper analyses the relationship between financial development and regional economic growth in Indonesia for the period 1993 to 2007, using the Arrelano-Bond Difference GMM estimator. The results show that there is a positive relationship between financial development and economic growth before the economic crisis 1998, particularly in a well-developed region (west region). After the crisis period (1999−2007), the development of financial intermediation is negatively related with economic growth. This evidence may be taken as proof that inefficient financial system is likely to suffer from economic crises. This paper further finds that a conditional convergence of income per capita took place within Indonesia and across provinces in the west region, suggesting that among provinces with the same financial development, the poorer provinces grew faster than the richer ones. Yet, that is not the case for the east region. The result also suggests that there is still much room to improve the role of the financial system on economic growth in less-developed regions. It should be very important and urgent to improve the efficiency of Indonesia’s financial intermediation. Ill-advised financial reforms should be removed in order to enhance the role of Indonesia’s financial sector on economic growth.

Kata Kunci : Financial development,Economic growth,Deposits,Credits,Indonesia