Financial Development And Economic Growth

Social development and political stability are on the premise of economic growth. Exploring reasons for economic growth and taking some measures to enhance the productivity are always the focus of theoretical attention. The researches hold the view that accumulation of factors of production, enhancement of resources allocation efficiency, technology progress, system development and religious faith are important elements influencing the economic growth. In recent years, economists pay more attention to the contributions of financial development to economic growth. The researches support that moderate financial development is a promotion to economic growth, otherwise, it will be negative to economic growth.At present, there are lots of researches based on the developed and transition countries, which lay a solid foundation for the study of financial development and economic growth in China. However, there are few researches on the relation of financial development and economic growth within China. So far, no research has been found about gap between financial development and economic growth within the province.As a big economic province, are the financial development conditions greatly different in each region of Shandong Province? Is there any remarkable correlativity between the financial development and the economic growth in different regions? Do initial financial development condition have effect on the long-term economic growth in each area?All the answers to the problems above are helpful to the researches on the effect of financial development on economic growth in certain areas. So, based on the research aims, using data from1995 to 2005 including 17 regions of Shandong province, this paper examines conditions about the financial development and economic growth among 17 regions and between the areas of eastern and western Shandong Province. Then the paper analyzes the reasons for the differences. When testing the correlation between the financial development and the regional economic growth in Shandong Province, not being able to control other elements influencing economic growth greatly, the current model may magnify the effect of financial development on the economic growth; Furthermore, for not considering the time effect and region effect in statistic analysis, the stability of the model will decline. So, we adopt the panel data and regression includes time and area-specific fixed effects together with instrument variable to advance the explanatory power of the model. To test the correlation between initial financial condition and long-term economic growth, we use OLS. The result is that initial financial condition is remarkably positive to long-term economic growth.