IDEAS home Printed from https://ideas.repec.org/a/bla/buecrs/v73y2021i4p736-761.html
   My bibliography  Save this article

Banking crises and economic growth in developing countries: Why privileging foreign direct investment over external debt?

Author

Listed:
  • Brahim Gaies
  • Mahmoud‐Sami Nabi

Abstract

The impact of external financing on the economies of developing countries is still a subject of debate among economists and policy makers. The objective of this paper is to contribute to this debate by shedding light on the interaction between foreign direct investment (FDI) and external debt. To this end, we begin by formulating an overlapping generation growth model that integrates a banking sector and find two complementary results. First, we show that external financing boosts investment projects and accelerates the dynamic of capital accumulation and economic growth. The second one mitigates this channel by showing two opposite indirect effects of external debt and FDI. Indeed, while external debt financing increases the vulnerability to a bank run that generates a recessionary impact on economic growth, FDI attenuates this recessionary impact and plays the role of a shock absorber. We empirically confirm these results for 67 developing countries over the period 1972–2015 using the GMM estimation of growth models and panel‐logit models to predict the determinants of banking crises. Hence, this study provides a comprehensive assessment of developing countries’ involvement in financial globalization and offers recommendations for their future international economic policies.

Suggested Citation

  • Brahim Gaies & Mahmoud‐Sami Nabi, 2021. "Banking crises and economic growth in developing countries: Why privileging foreign direct investment over external debt?," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 736-761, October.
    • Handle: RePEc:bla:buecrs:v:73:y:2021:i:4:p:736-761
    DOI: 10.1111/boer.12271
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/boer.12271
    Download Restriction: no
    File URL: https://libkey.io/10.1111/boer.12271?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Batuo, Michael & Mlambo, Kupukile & Asongu, Simplice, 2018. "Linkages between financial development, financial instability, financial liberalisation and economic growth in Africa," Research in International Business and Finance, Elsevier, vol. 45(C), pages 168-179.
    2. Boucekkine, R. & Fabbri, G. & Pintus, P., 2014. "Growth and financial liberalization under capital collateral constraints: The striking case of the stochastic AK model with CARA preferences," Economics Letters, Elsevier, vol. 122(2), pages 303-307.
    3. Brahim Gaies & Stéphane Goutte & Khaled Guesmi, 2019. "Does Financial Globalization Still Spur Growth In Emerging And Developing Countries? Considering Exchange Rate Volatility'S Effects," Working Papers hal-01968082, HAL.
    4. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    5. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    6. Charilaos Mertzanis, 2019. "Financialisation, institutions and financing constraints in developing countries," Cambridge Journal of Economics, Oxford University Press, vol. 43(4), pages 825-866.
    7. Loayza, Norman V. & Ranciere, Romain, 2006. "Financial Development, Financial Fragility, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1051-1076, June.
    8. Hamdi, Helmi & Jlassi, Nabila Boukef, 2014. "Financial liberalization, disaggregated capital flows and banking crisis: Evidence from developing countries," Economic Modelling, Elsevier, vol. 41(C), pages 124-132.
    9. Combes, Jean-Louis & Kinda, Tidiane & Ouedraogo, Rasmané & Plane, Patrick, 2019. "Financial flows and economic growth in developing countries," Economic Modelling, Elsevier, vol. 83(C), pages 195-209.
    10. Nabila Boukef Jlassi & Helmi Hamdi & Joseph P. Joyce, 2018. "External liabilities, domestic institutions and banking crises in developing economies," Review of International Economics, Wiley Blackwell, vol. 26(1), pages 96-116, February.
    11. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 971-989, November.
    12. Philip R. Lane & Peter McQuade, 2014. "Domestic Credit Growth and International Capital Flows," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 218-252, January.
    13. Crafts, Nick, 1996. "'Post-neoclassical Endogenous Growth Theory': What Are Its Policy Implications?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(2), pages 30-47, Summer.
    14. Berger, Allen N. & Black, Lamont K., 2011. "Bank size, lending technologies, and small business finance," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 724-735, March.
    15. Enrica Detragiache & Thierry Tressel & Poonam Gupta, 2008. "Foreign Banks in Poor Countries: Theory and Evidence," Journal of Finance, American Finance Association, vol. 63(5), pages 2123-2160, October.
    16. Mishkin, Frederic S., 2009. "Globalization and financial development," Journal of Development Economics, Elsevier, vol. 89(2), pages 164-169, July.
    17. Ayhan Kose, M. & Prasad, Eswar S. & Taylor, Ashley D., 2011. "Thresholds in the process of international financial integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 147-179, February.
    18. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
    19. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
    20. Wajih Khallouli & Mahmoud Sami Nab, 2013. "Banking soundness and financial crises' predictability: a case study of Turkey," International Economics, CEPII research center, issue 135-136, pages 62-78.
    21. Avdjiev, Stefan & Gambacorta, Leonardo & Goldberg, Linda S. & Schiaffi, Stefano, 2020. "The shifting drivers of global liquidity," Journal of International Economics, Elsevier, vol. 125(C).
    22. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    23. de Haas, Ralph & van Lelyveld, Iman, 2010. "Internal capital markets and lending by multinational bank subsidiaries," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 1-25, January.
    24. Mahmoud Sami Nabi & Imed Drine, 2009. "External Debt, Informal Economy and Growth," Economics Bulletin, AccessEcon, vol. 29(3), pages 1695-1707.
    25. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    26. Philip R. Lane & Gian Maria Milesi-Ferretti, 2018. "The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 189-222, March.
    27. Jahmane, Abderrahmane & Gaies, Brahim, 2020. "Corporate social responsibility, financial instability and corporate financial performance: Linear, non-linear and spillover effects – The case of the CAC 40 companies," Finance Research Letters, Elsevier, vol. 34(C).
    28. Trabelsi, Mohamed & Cherif, Mondher, 2017. "Capital account liberalization and financial deepening: Does the private sector matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 141-151.
    29. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September.
    30. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    31. Gaies, Brahim & Goutte, Stéphane & Guesmi, Khaled, 2020. "Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates," Research in International Business and Finance, Elsevier, vol. 52(C).
    32. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
    33. Mertzanis, Charilaos, 2019. "Family ties, institutions and financing constraints in developing countries," Journal of Banking & Finance, Elsevier, vol. 108(C).
    34. Fernando A. Broner & Guido Lorenzoni & Sergio L. Schmukler, 2013. "Why Do Emerging Economies Borrow Short Term?," Journal of the European Economic Association, European Economic Association, vol. 11, pages 67-100, January.
    35. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2009. "Adjusting to Capital Account Liberalization," Working Papers 2009-2, Princeton University. Economics Department..
    36. Clarke, George R.G. & Cull, Robert & Martinez Peria, Maria Soledad, 2006. "Foreign bank participation and access to credit across firms in developing countries," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 774-795, December.
    37. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    38. Takuma Kunieda & Keisuke Okada & Akihisa Shibata, 2014. "Corruption, capital account liberalization, and economic growth: Theory and evidence," International Economics, CEPII research center, issue 139, pages 80-108.
    39. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    40. repec:cii:cepiei:2013-q3-4-135-136-5 is not listed on IDEAS
    41. Gaies, Brahim & Goutte, Stéphane & Guesmi, Khaled, 2019. "Banking crises in developing countries–What crucial role of exchange rate stability and external liabilities?," Finance Research Letters, Elsevier, vol. 31(C).
    42. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    43. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
    44. R. T.A. de Haas & I. P.P van Lelyveld, 2004. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(2), pages 125-151, August.
    45. Joe Peek & Eric Rosengren, 2000. "Implications of the globalization of the banking sector: the Latin American experience," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 45-62.
    46. Paul Krugman, 2009. "The Increasing Returns Revolution in Trade and Geography," American Economic Review, American Economic Association, vol. 99(3), pages 561-571, June.
    47. Ahmed, Abdullahi D., 2016. "Integration of financial markets, financial development and growth: Is Africa different?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 43-59.
    48. Philippe Aghion & Peter Howitt, 2009. "The Economics of Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 9780262012638, December.
    49. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    50. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    51. Okada, Keisuke, 2013. "The interaction effects of financial openness and institutions on international capital flows," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 131-143.
    52. Niels Hermes & Robert Lensink, 2008. "Does financial liberalization influence saving, investment and economic growth: evidence from 25 emerging market economies, 1973-1996," ULB Institutional Repository 2013/14403, ULB -- Universite Libre de Bruxelles.
    53. Gomes Neto, Delfim & Veiga, Francisco José, 2013. "Financial globalization, convergence and growth: The role of foreign direct investment," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 161-186.
    54. Mustafa Caglayan & Bing Xu, 2019. "Economic Policy Uncertainty Effects On Credit And Stability Of Financial Institutions," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 342-347, July.
    55. Chien-Chiang Lee & Meng-Fen Hsieh & Hua-Wei Dai, 2012. "How Does Foreign Bank Ownership In The Banking Sector Affect Domestic Bank Behaviour? A Dynamic Panel Data Analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 64(Supplemen), pages 86-108, December.
    56. Badi Baltagi & Seuck Song, 2006. "Unbalanced panel data: A survey," Statistical Papers, Springer, vol. 47(4), pages 493-523, October.
    57. Brahim Gaies & Stephane Goutte & Khaled Guesmi, 2019. "What Interactions between Financial Globalization and Instability?—Growth in Developing Countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 31(1), pages 39-79, January.
    58. Patrick McGuire & Nikola Tarashev, 2008. "Bank health and lending to emerging markets," BIS Quarterly Review, Bank for International Settlements, December.
    59. Aoki, Kosuke & Benigno, Gianluca Dimiano Carmelo & Kiyotaki, Nobuhiro, 2010. "Adjusting to capital account liberalization," LSE Research Online Documents on Economics 121723, London School of Economics and Political Science, LSE Library.
    60. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    61. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
    62. repec:bla:buecrs:v:64:y:2012:i::p:s86-s108 is not listed on IDEAS
    63. repec:cii:cepiei:2014-q3-139-5 is not listed on IDEAS
    64. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    65. Li, Chengchun & Tanna, Sailesh, 2019. "The impact of foreign direct investment on productivity: New evidence for developing countries," Economic Modelling, Elsevier, vol. 80(C), pages 453-466.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Veronika V. Yankovskaya & Timur A. Mustafin & Dmitry A. Endovitsky & Artem V. Krivosheev, 2022. "Corporate Social Responsibility as an Alternative Approach to Financial Risk Management: Advantages for Sustainable Development," Risks, MDPI, vol. 10(5), pages 1-18, May.
    2. S. M. Shamsul Alam & Mohammad Abdul Matin Chowdhury & Dzuljastri Bin Abdul Razak, 2021. "Research evolution in banking performance: a bibliometric analysis," Future Business Journal, Springer, vol. 7(1), pages 1-19, December.
    3. Gaies, Brahim & Nakhli, Mohamed Sahbi & Ayadi, Rim & Sahut, Jean-Michel, 2022. "Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 290-303.
    4. Brahim Gaies, 2022. "Reassessing the impact of health expenditure on income growth in the face of the global sanitary crisis: the case of developing countries," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1415-1436, December.
    5. Maria Giuseppina Bruna & Béchir Ben Lahouel & Brahim Gaies, 2022. "Dans les brumes de l'endogénéité. Une étude critique des relations entre performance sociétale et performance économique," Post-Print hal-04070564, HAL.
    6. Brahim Gaies, 2023. "Banking sector openness, a path to social responsibility? Evidence from Southern European banks," Economics and Business Letters, Oviedo University Press, vol. 12(4), pages 284-295.
    7. Gaies, Brahim & Nakhli, Mohamed Sahbi & Sahut, Jean Michel & Guesmi, Khaled, 2021. "Is Bitcoin rooted in confidence? – Unraveling the determinants of globalized digital currencies," Technological Forecasting and Social Change, Elsevier, vol. 172(C).
    8. Kanzari, Dalel & Nakhli, Mohamed Sahbi & Gaies, Brahim & Sahut, Jean-Michel, 2023. "Predicting macro-financial instability – How relevant is sentiment? Evidence from long short-term memory networks," Research in International Business and Finance, Elsevier, vol. 65(C).
    9. Gaies, Brahim & Jahmane, Abderrahmane, 2022. "Corporate social responsibility, financial globalization and bank soundness in Europe – Novel evidence from a GMM panel VAR approach," Finance Research Letters, Elsevier, vol. 47(PB).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gaies, Brahim & Goutte, Stéphane & Guesmi, Khaled, 2020. "Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates," Research in International Business and Finance, Elsevier, vol. 52(C).
    2. Brahim Gaies & Stéphane Goutte & Khaled Guesmi, 2019. "Does Financial Globalization Still Spur Growth In Developing Countries? Considering Exchange Rate Volatility," Working Papers halshs-02175361, HAL.
    3. Brahim Gaies & Stéphane Goutte & Khaled Guesmi, 2019. "Does Financial Globalization Still Spur Growth In Emerging And Developing Countries? Considering Exchange Rate Volatility'S Effects," Working Papers hal-01968082, HAL.
    4. Cavallo, Alberto F. & Cavallo, Eduardo A., 2010. "Are crises good for long-term growth? The role of political institutions," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 838-857, September.
    5. Brahim Gaies, 2021. "Curse or blessing: how do oil price fluctuations influence financial development in low- and middle-income net oil-exporting countries?," Economics Bulletin, AccessEcon, vol. 41(2), pages 751-763.
    6. Brahim Gaies, 2017. "Globalisation Financière, Croissance et effets de seuil : Le Cas des pays en développement Les moins avancés," EconomiX Working Papers 2017-25, University of Paris Nanterre, EconomiX.
    7. Fajeau, Maxime, 2021. "Too much finance or too many weak instruments?," International Economics, Elsevier, vol. 165(C), pages 14-36.
    8. Fatma Tasdemir, 2023. "Financial Globalization and Growth: The Impacts of Financial Development and Governance," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 9(1), pages 99-111, June.
    9. Becerra, O. & Cavallo, E. & Scartascini, C., 2012. "The politics of financial development: The role of interest groups and government capabilities," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 626-643.
    10. Ashraf, Badar Nadeem, 2018. "Do trade and financial openness matter for financial development? Bank-level evidence from emerging market economies," Research in International Business and Finance, Elsevier, vol. 44(C), pages 434-458.
    11. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    12. Mustafa Caglayan & Omar S. Dahi & Firat Demir, 2013. "Trade Flows, Exchange Rate Uncertainty, and Financial Depth: Evidence from 28 Emerging Countries," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 905-927, April.
    13. Elya Nabila Abdul Bahri & Abu Hassan Shaari Md Nor & Tamat Sarmidi & Nor Hakimah Haji Mohd Nor, 2019. "The Role of Financial Development in the Relationship Between Foreign Direct Investment and Economic Growth: A Nonlinear Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-32, June.
    14. Roberto Dell'Anno & Adalgiso Amendola, 2015. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 61(2), pages 274-301, June.
    15. Raja Almarzoqi & Sami Ben Naceur & Akshay Kotak, 2015. "What Matters for Financial Development and Stability?," IMF Working Papers 2015/173, International Monetary Fund.
    16. Jahmane, Abderrahmane & Gaies, Brahim, 2020. "Corporate social responsibility, financial instability and corporate financial performance: Linear, non-linear and spillover effects – The case of the CAC 40 companies," Finance Research Letters, Elsevier, vol. 34(C).
    17. Coletta Frenzel Baudisch, 2018. "Sectoral FDI and the Real Exchange Rate: The Role of Financial Development," MAGKS Papers on Economics 201828, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    18. Gnangnon, Sèna Kimm, 2019. "Financial Development and Tax Revenue in Developing Countries: Investigating the International Trade and Economic Growth Channels," EconStor Preprints 206628, ZBW - Leibniz Information Centre for Economics.
    19. Feng Wei & Yu Kong, 2016. "Financial Development, Financial Structure, and Macroeconomic Volatility: Evidence from China," Sustainability, MDPI, vol. 8(11), pages 1-20, November.
    20. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:buecrs:v:73:y:2021:i:4:p:736-761. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0307-3378 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.