BOT report highlights negative impact of financial sector
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Although it plays a crucial role in supporting economic growth, the financial sector could become a threat to long-term growth, according to a Bank of Thailand research.
Entitled “Financial Development and Long-term Growth”, the research showed that the growing size of the financial sector does not guarantee economic growth. Plus, the ever-growing size of the financial sector could intensify future volatility, given the greater connectivity of domestic and international economies.
The paper is one of six to be presented at an annual BOT Symposium on September 19-20. Contained are the lessons from the economic crises in Thailand, Asia and the United States, when the financial sector fuelled the situation.
The financial sector supports the economy by lowering the cost of funds and enhancing the efficiency of financial resource allocation.
“The financial sector supports economic growth when other growth factors [for instance, education, government spending and the economic exposure to international markets] are under control. However, the positive relation is limited.”
One assumption in the paper is that the financial sector accumulates economic imbalances and through time it would enlarge the imbalance and cause an economic crisis. This looks highly possible in light of economic bubbles, which lead to massive allocation of resources to the sector. This deprives the growth of the real sectors and affects economic growth and stability.
As such, financial sector development should not focus only on size enlargement, but also other dimensions that will increase the sector’s efficiency as well as minimise possible impacts on the overall economy, the paper suggested.
At the symposium, proposals to develop the sector while ensuring economic stability will be presented. These include improvement in the supervision of financial institutions, the reduction in financial transaction costs and the wider access to financial services.
