THE LINK BETWEEN FINANCIAL AND ECONOMIC DEVELOPMENT: THE ROLE OF CAPITAL MARKETS

Abstract

Abstract: The financial sector is a complex of markets for financial assets and financial services, which can assist in steering an economy away from plodding, repetitive performance to accelerated growth and development. Since the latter part of the 1970s, there has been growing interest in the influence capital markets can have on the process of economic development, with a plethora of studies having been conducted on this issue. This paper attempts to examine the link between economic development and capital markets, particularly stock markets, through extensive empirical analysis using regression methods. Based on this analysis, some concluding observations are also presented. The ultimate goal is to ascertain whether a link does indeed exist or not. The paper explores the following areas: (1) An examination of the various literature works that have surfaced in recent years concerning the role of the financial sector in economic development, with a particular focus on the contribution of capital markets. (2) An in-depth analysis of the relationship under study using empirical data. Numerous forms of analysis are conducted, including extensive correlation studies (3) Final assessment of the link between economic development and stock markets based on the empirical results. Among the concluding observations and remarks derived from this study, the following points stand out as the most significant: a - The proliferation of publicly listed companies on organized stock exchanges. b - The phenomenal growth in stock market capitalization and the value of shares traded in both developed and emerging markets. c - The interrelated nature of economic growth, saving and investment, income, and financial deepening. d - Financial liberalization, alongside the points mentioned in (c), have induced rampant growth in capital market services. e - Statistical verification of the link between stock markets and economic development. There are, however, some caveats to this issue that can be summarized as follows: o Stock markets are not an absolute panacea for solving the problems of financial resources allocation. o Stock markets can help promote the economic well-being of a country, but only gradually, and in some cases, after a considerable gestation period A supportive social, political, and legal environment, as well as an economic environment, are important factors to the economic success of stock markets