Financial development and poverty reduction: panel data analysis of South Asian countries

Abstract

Purpose – The purpose of this paper is to examine the contribution of financial development to poverty reduction in 11 South Asian developing countries using panel data set over the time period 1990-2012. Design/methodology/approach – The stationarity properties are checked by using Levin-Lin-Chu and Im-Pesaran-Shin panel unit root tests. The paper applied the Pedroni’s panel co-integration test to examine the existence of long-run relationship. The coefficients of co-integration are examined by fully modified OLS (FMOLS) and the causal link is checked by panel causality test. Findings – The empirical results of Pedroni co-integration test confirm a long-run relationship between financial development and poverty reduction in South Asian developing economies. The findings of FMOLS method confirm a strong and positive relationship between financial development, trade openness, inflation and poverty reduction. Results of panel causality test indicate that there is a unidirectional causality running from financial development to poverty reduction variable. Research limitations/implications – The present study recommends appropriate economic and financial reforms focussing on financial inclusion to reduce poverty in selected South Asian economies. Originality/value – This paper is the first of its kind to empirically examine the causal relationship between financial sector development and poverty reduction in South Asian economies using modern econometric techniques.