Can Emerging Economies Learn Lessons of Institutional Spillover Effect on Financial Development and Economic Growth: Dynamic Spatial Econometric Approach

The contemporary environment is interrelated, and interactions between markets, states and international actors at different levels exist in every corner of the globe. The failures of the free-market system have paved the way for institutionalism, which proposes minimising transaction costs, substantial property rights and enabling proper contract enforcement. Most studies on institutions concerning finance–growth relationships are conclusive and inconsistent. This study explores the spatial institutional spillover on financial development and economic growth. The variables of good governance indicators for institutions, the financial development index to measure financial development and per capita gross domestic product (GDP) for economic growth are mainly used in this study. The study explored the spatial impact between countries by the panel data of 153 countries for 2002–2019 using the Dynamic Spatial Econometric Modelling (DSEM) on institutional, spatial implications and spatial institutional impact by the moderation of financial development on growth. Results indicate that the financial development and institutions of surrounding countries create a reverse spatial spillover impact on local countries, governments or areas. However, the institutional moderation impact of financial development has created a spatial spillover between countries. Results concluded that global governance is a positive-sum game; monitoring and governance structures have failed at the international level concerning separate states. To prevent institutional failure at the state level, good governance and links with the global governance structure could disrupt or energise local institutions. The findings may broadly be helpful for the policy makers who are looking into the lessons for market volatilities and uncertainties of emerging economies.