Are finance and human development important for economic growth? International evidence from dynamic GMM approach

Abstract

A great number of theoretical and empirical studies have been carried out to identify the determinants of economic growth in developing countries. While many nations have emerged as developed economies since the end of World War II, most of the Muslim majority countries entangled in wars, foreign invasions, coups, ethnic rivalries and sectarian violence. In spite of showing tremendous economic performance, many emerging Muslim countries have lost their growth trajectory in the last two decades or so. At one end of the spectrum, there is extreme poverty, poor healthcare, illiteracy and low levels of human capital accumulation. There is also political instability, rampant corruption, underdeveloped financial sector, absence of property rights, lack of rule of law and resource curse restrain sustainable growth in most of the OIC countries. Are these countries poor because of their religious affiliation? The reality is that most Muslim societies do not embrace efficient institutions, rules and rule-compliance to promote development (Askari and Rehman 2013). Thus, a humble attempt is made here to find some answers to the following questions: Are human development and financial development important for economic growth in member countries of the Organization for Islamic Conference (OIC)? How are they different from other developing countries? In addition to that we investigate how financial development affects growth indirectly.The OIC countries represent one of the world’s largest markets with around 1.3 billion consumers who roughly constitute 25% of the world population. The OIC was established in 1969 with the purpose of promoting closer cooperation among Islamic countries in the economic, political and cultural fields. Currently, there are 57 member countries throughout the world with great diversity in terms of economic structure, political system, development level, ethnic background as well as social and cultural environment.