Next the casual link between crisis and repression is discussed. As given in Table 8, it is repression^crisis(+) in India, Indonesia, Korea and Malaysia and repression^crisis in Thailand. While the high degree of financial repression seems to cause financial crisis in four countries, it is inverted in Thailand where the low degree of financial repression is clearly observed immediately before the Asian crisis (see Appendix 9(e)). For the countries except Thailand, we consider that an extremely high degree of financial repression in a boom period attracted more speculative funds — rather than contained a credit boom — further increasing the volatility in those economies where the financial market was progressively liberalized but not well regulated and controlled. Such a mechanism might have worked in India, Indonesia, Korea and Malaysia before these countries were severely hit by financial crisis. For Thailand, on the other hand, an expansionary financial trend — as approximated by the low degree of FR — might have typically created a financial boom led by investment opportunities that were rapidly increasing but were not properly hedged. Computer usage
This article examines the causality between financial development, economic growth and financial crisis in India, Indonesia, Korea, Malaysia and Thailand through the techniques of VECM and ARDL. As far as the results of the finance-growth nexus are concerned, although the same variables and methodology are employed, different causal directions (i.e., either finance-growth or growth^finance or finance-growth) have been detected across the five Asian countries. This fact supports the validity of country-by-country analysis employing time series techniques over the cross-country and panel data analysis that seeks a single generalized result by pooling and averaging several countries’ data. Besides our findings are more plausible than those from a simple bivariate model since financial crisis, financial repression and structural break — which exhibit vital background effects on the finance-growth nexus — are taken into estimation. Moreover, the use of VECM and ARDL adds more robustness to the analysis as the long-run relationship has been confirmed through two different types of cointegration test. One limitation of this study is that it requires the sample countries to offer a variety of long enough, consecutive data series. Therefore, it is not readily applicable to countries like Sub-Saharan African countries whose data scarcity is well known. However, as long as sufficient data series are provided, the analysis can be implemented, through which each country’s estimate is compared with others. Finally, we present the following policy implications. First, the positive effect of finance on growth should be evaluated with the fact that deeper financial development can lead to financial crisis. Therefore, while the positive impact of finance-growth is confirmed, we must mind the adverse effect due to the positive bilateral causality of finance^crisis as the substantial cost of financializing an economy. Second, based on the findings of the link between crisis and repression, we argue that, in regulating the financial systems, the roles of governments and monetary authorities are crucial and their prime emphasis should be put on reducing and eliminating the threat of financial crisis whose cost is economically and socially huge.