DO INSTITUTIONAL QUALITY AND POLITICAL RISK MATTER FOR FINANCIAL DEVELOPMENT? EVIDENCE FROM THE SELECTED EMERGING ECONOMIES

Abstract

Institutional quality and political risk have emerged as critical factors for financial development in emerging countries. If the financial markets in emerging economies are to progress further, they require strong institutional support. Following the argument, this study examines the role of institutional quality and political risk on financial development in selected eight emerging countries. The study covers the yearly data from 2000 to 2019 and applies the dynamic panel data estimation technique to reach the overall objective. The results conclude that institutional quality and political stability are significant factors for financial development in the panel countries. Furthermore, our results find that institutional quality has emerged as a stronger determinant than political risk that promotes financial development. Policymakers need to devise and implement policies that promote voice and accountability and help to control corruption. The improved situation of rule of law and stable political environment increase investor confidence at home and abroad, thereby increasing the financial development in emerging countries. Since the financial institutions of emerging countries rapidly integrate with a global financial system, there are opportunities for inheriting good governance practices from technologically advanced countries. This would create a win–win situation.