Banks, Financial Development and Regional Growth

This work deals with finance and banking and the linkage between finance and economic growth in Thailand. Notwithstanding a strong reserve position and macroeconomic performance between mid-1980s and mid-1990s, the Thai economy in 1997 suffered the worst twin crisis in its history. This raises many related questions. What made the favourable performance disappear within a few years? What can we do to prevent financial crises in the future? Did the expanded participation of foreign banks in the Thai banking industry after the crisis lead to efficiency gains? And more generally, are there long-run effects of financial development on real economic growth? This work is intended to answer these questions. The main finding is that the growth rates of regional real incomes in Thailand during 1981 and 2003 are significantly negatively related to the initial level of regional real incomes as expected from unconditional convergence in growth theory. Based on the concept of conditional convergence, the results show that there is a divergence of regional real incomes in Thailand during 1994 and 2003, i.e. after controlling the differences in financial development, the richer ones grew faster. Based on the Granger causality test results, there is a bi-directional causality between finance and growth. Although this work is based on the case of Thailand, international evidence and comparisons are also included.