The Effect of Financial development and Trade liberalization on Eeconomic growth In Upper Middle Income Countries

Abstract For more than a decade now, Various efforts have been put in place by various governments of developing economies to promote economic growth. The impact of financial development and Trade liberalization on economic growth in the developing economies has been a subject of much debates and controversies. The contradictions in literature on the subject matter shows that these relationships is still an unsettled matter. The purpose of this paper is to empirically investigate the impact of financial development and trade liberalization on economic growth in upper middle income developing countries using annual time series data between 2000 and 2017. Furthermore, Due to multi-faceted and broad concept of financial development, We took a novel approach and created a Composite financial development index based on three dimensions: depth, access, and efficiency of financial institutions and markets. The results of this study, using two step system generalized method of moments (SYS-GMM), Show the positive and significant effects of financial development on economic growth. We also found that trade liberalization has a positive and significant impact on economic growth in countries studied in this paper, both in term of increasing trade volume and reducing tariff and non-tariff barriers. Finally, the results illustrate that the good performance of the financial system reinforces the effect of trade liberalization and vice versa. As to study finding, the implementation of trade openness enhancement policies as well as the policies that result in the deepening and increasing the efficiency of financial sector and thus developing this sector, can be the factor for economic growth.