THE CONTRIBUTION OF FINANCIAL DEVELOPMENT TO FORMALIZATION THROUGH ECONOMIC GROWTH: EVIDENCE FROM CROSS-COUNTRY DATA

Abstract

The aim of the paper is to formulate empirical specification models to examine whether financial development stimulates economic growth and encourages formalization. Cross-country data analysis of 140 sample countries during the period from 2000 to 2018 were utilized, together with new indexes of financial development. The income decomposition method and the two-step estimation approach, together with the multiple linear regression with interactions effect, were employed as empirical methods. It was found that financial development can lower informal self-employment through economic growth. Financial development also contributes to economic growth. Therefore, development of financial markets and financial institutions should be an alternative policy to control informal employment.