HUMAN DEVELOPMENT, INSTITUTIONAL QUALITY, AND FINANCIAL DEVELOPMENT: EVIDENCE FROM MIDDLE-INCOME COUNTRIES

Authors

  • Thi Anh Nhu Nguyen University of Economics and Law, Vietnam National University, Ho Chi Minh City

DOI:

https://doi.org/10.2478/eoik-2025-0066

Keywords:

Human capital, Institutional quality, Financial development, Middle-income countries

Abstract

Contrasted sharply with a large cohort of studies on financial devel-

opment in developed and developing countries, research observed

particularly in middle-income countries is uncommon. Accordingly,

this research explores the effect of human development and institu-

tional quality on financial development in 84 middle-income coun-

tries from 2004 to 2022. Furthermore, it examines the impact of the

interaction between six indicators of institutional quality and human

development on financial development. In this research, financial

development is captured in two core sectors of the financial system,

namely financial institutions and financial markets. The baseline re-

sults estimated by difference-GMM indicate that human development

positively influences financial development regarding financial in-

stitutions. However, this factor negatively affects financial develop-

ment regarding financial markets. When institutional quality interacts

with human development, it could amplify the impacts on financial

development. Specifically, better institutional quality regarding law

and government effectiveness could promote financial development

in both financial institutions and markets, while control of corruption

shows a non-significant link. Findings from this research contribute

meaningful evidence to design policies inducing financial develop-

ment in middle-income countries.

References

Acemoglu, D., Johnson, S., Robinson, J.A. (2002). Reversal of fortunes: geography and institutions in

the making of the modern world income distribution. Quarterly Journal of Economics, 117(4),

–1294. https://doi.org/10.1162/003355302320935025

Alawi, S.M.; Abbassi, W.; Saqib, R. & Sharif, M. (2022). Impact of Financial Innovation and Institu-

tional Quality on Financial Development in Emerging Markets. Journal of Risk and Financial

Management, 15(3): 1 - 11. https://doi.org/10.3390/jrfm15030115

Al-Jomard, A.A., Adeeb Ibrahim, I., & Saber Muhamad, B. (2025). The Impact of Resources on Eco-

nomic Growth through Macroeconomic Variables. Economics - innovative and economics re-

search journal, 13(2), 161–177. https://doi.org/10.2478/eoik-2025-0035

Allub, L., Gomes, P., & Kuehn, Z. (2024). Human Capital and Financial Development: Firm-Level Inter-

actions and Macroeconomic Implications, The Economic Journal, 134(659): 934–958. https://

doi.org/10.1093/ej/uead098

Almarzoqi, R. M., Naceur, S. N. & Kotak, A. (2015). What Matters for Financial Development and

Stability? IMF Working Paper, WP/15/173.

Aluko, O. A., & Ibrahim, M. (2020). Institutions and the financial development–economic growth nexus

in sub‐Saharan Africa. Economic Notes, 49(3), e12163. https://doi.org/10.1111/ecno.12163

Atsu, F., & Adams, S. (2023). Financial Development and Innovation: Do Institutions and Human Cap-

ital Matter? Heliyon, 9(8), e19015. https://doi.org/10.1016/j.heliyon.2023.e19015

Azizi, S. (2020). Impacts of remittances on financial development. Journal of Economic Studies, 47(3),

-477. https://doi.org/10.1108/JES-01-2019-0045

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2003). Law, endowments, and finance. Journal of Financial

Economics, 70(2), 137–181. https://doi.org/10.1016/s0304-405x(03)00144-2

Chen, H., Dai, Y. & Guo, D. (2023). Financial literacy as a determinant of market participation: New

evidence from China using IV-GMM. International Review of Economics & Finance, 84, 611-

https://doi.org/10.1016/j.iref.2022.11.034

Danlami, M. R., Loganathan, N. Streimikiene, D., Mardani, A., & Golam Hassan, A.A. (2018). The

effects of financial development and trade openness on Nigeria‘s dynamic growth. Economics

and Sociology, 11(4), 128-141. https://doi.org/10.14254/2071-789X.2018/11-4/8

Dejene M. B. (2019). Political institutions, human capital and innovation: evidence from sub-Saharan

Africa, Democratization, 26(4), 666-708. https://doi.org/10.1080/13510347.2019.1574296

Deuflhard, F., Georgarakos, D. & Inderst, R. (2019). Financial Literacy and Savings Account Returns. Jour-

nal of the European Economic Association, 17(1), 131–164. https://doi.org/10.1093/jeea/jvy003

Edeme, R.K. & God, E.E.T. (2022). Interactive Effect of Population Growth and Institutional Quality

on Environmental Sustainability in West Africa Region. Environmental Sustainability, Growth

Trajectory and Gender: Contemporary Issues of Developing Economies, Emerald Publishing

Limited, 37-49. https://doi.org/10.1108/978-1-80262-153-220221004

Eryiğit, S. B., Eryiğit, K. Y., & Dülgeroğlu, E. (2015). Local Financial Development and Capital Accumulations:

Evidence from Turkey. Panoeconomicus, 62(3), 339–360. https://doi.org/10.2298/PAN1503339E

Farayibi, A. O., & Folarin, O. (2021). Does government education expenditure affect educational out-

comes? New evidence from Sub-Saharan African countries. African Development Review,

(3), 546–559. https://doi.org/10.1111/1467-8268.12588

Feng, Y., & Yu, X. (2021). The impact of institutions on financial development: Evidence from East Asian

countries. Australian Economic Papers, 60(1), 122-137. https://doi.org/10.1111/1467-8454.12196

Ferede M. A. (2022). The Effect of Political Institution and Human Capital on Economic Growth of

Sub-Saharan African Countries. Journal of World Economic Research, 11(1), 11-18. https://doi.

org/10.11648/j.jwer.20221101.12

Human Development, Institutional Quality, and Financial Development: Evidence from Middle-Income Countries

Gutsche, G., Nakai, M. & Arimura, T. H. (2021). Revisiting the determinants of individual sustainable

investment: The case of Japan. Journal of Behavioral and Experimental Finance, 30, 100497.

https://doi.org/10.1016/j.jbef.2021.100497

Hernández-Medina, P., Gurría, J., Cabrera-Becerra, J., & Morales-La Paz, L. (2024). Social capital and

economic performance for South America: A panel data analysis. Economics and Sociology,

(4), 217-233. http://dx.doi.org/10.14254/2071-789X.2024/17-4/12

Hussain, M., Ye, Z., Bashir, A., Chaudhry, N. I., Zhao, Y. (2021). A nexus of natural resource rents,

institutional quality, human capital, and financial development in resource-rich high-income

economies. Resources Policy, 74, 102259. https://doi.org/10.1016/j.resourpol.2021.102259

Ibrahim, M., & Sare, Y. A. (2018). Determinants of financial development in Africa: How robust is the

interactive effect of trade openness and human capital? Economic Analysis and Policy, 60, 18-

https://doi.org/10.1016/j.eap.2018.09.002

Ivanyna, M., & Salerno, A. (2021). Governance for inclusive growth. IMF Working Paper, WP/2021/098.

Jude, C.; Levieuge, G. (2017). Growth effect of foreign direct investment in developing economies: The role

of institutional quality. The World Economy, 40(4), 715–742. https://doi.org/10.1111/twec.12402

Kaidi, N.; Mensi, S.; Ben Amor, M. (2019). Financial Development, Institutional Quality and Pov-

erty Reduction: Worldwide Evidence. Social Indicators Research, 141, 131–156. https://doi.

org/10.1007/s11205-018-1836-0

Kakhkharov, J. & Rohde, N. (2020). Remittances and financial development in transition economies.

Empirical Economics, 59, 731–763. https://doi.org/10.1007/s00181-019-01642-3

Kassie, N. M. (2021). The effects of financial development on economic growth in Africa: Does the

quality of institutions matter? Journal of Business Economics and Finance, 10(4), 166–177.

https://doi.org/10.17261/Pressacademia.2021.1462

Khan, M. S. R., Rabbani, N., & Kadoya, Y. (2020). Is financial literacy associated with investment in finan-

cial markets in the United States? Sustainability, 12(18), 7370. https://doi.org/10.3390/su12187370

Khan, M.A.; Kong, D.; Xiang, J.; Zhang, J. (2020). Impact of Institutional Quality on Financial De-

velopment: Cross Country Evidence based on Emerging and Growth Leading Economies.

Emerging Markets Finance and Trade, 56(15), 3829 - 3845. https://doi.org/10.1080/154049

X.2019.1588725

Khan, Z., Hussain, M., Shahbaz, M., Yang, S., & Jiao, Z. (2020). Natural resource abundance, techno-

logical innovation, and human capital nexus with financial development: A case study of China.

Resources Policy, 65, 101585. https://doi.org/10.1016/j.resourpol.2020.101585

Kombo, P. G. B. N. & Koumou, G. B. (2021). The Role of the Quality of Institutions in the Financial Devel-

opment of CEMAC Countries. Modern Economy, 12(2). https://doi.org/10.4236/me.2021.122023

Kovačević, I., & Manojlović, M. (2024). Base Rate Neglect Bias: Can it be Observed in HRM Decisions

and Can it be Decreased by Visually Presenting the Base Rates in HRM Decisions? Interna-

tional Journal of Cognitive Research in Science, Engineering and Education (IJCRSEE), 12(1),

–132. https://doi.org/10.23947/2334-8496-2024-12-1-119-132

Kutan, A. M., Samargandi, N., & Sohag, K. (2017). Does institutional quality matter for financial de-

velopment and growth? Further evidence from MENA countries. Australian Economic Papers,

(3), 228–248. https://doi.org/10.1111/1467-8454.12097

La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and Finance. Journal of

Political Economy, 106(6), 1113–1155. https://doi.org/10.1086/250042

Lucas, R. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, 22(1),

-42. https://doi.org/10.1016/0304-3932(88)90168-7

Lusardi, A., Hasler, A., & Yakoboski, P. J. (2021). Building up financial literacy and financial resilience.

Mind & Society, 20(2), 181–187. https://doi.org/10.1007/s11299-020-00246-0

Masron, T.A.; Nor, E. (2013). FDI in ASEAN–8: Does institutional quality matter? Applied Economics

Letters 20(2), 186–189. https://doi.org/10.1080/13504851.2012.687090

Nguyen T. A. N. / Economics - Innovative and Economics Research Journal, doi: 10.2478/eoik-2025-0066

Mastilo, Z., Barić, F. & Puška, A. (2025). Challenges and Opportunities of Implementing Digital Pay-

ment Systems in Southeast European Countries. Journal of Central Banking Theory and Prac-

tice, 14(2), 5-28. https://doi.org/10.2478/jcbtp-2025-0011

Milutinović, O., Anđelić, S., Garabinović, D., & Bajac, M. (2024). Management and Organization of

Human Resources in Science and Technology of the Republic of Serbia. International Jour-

nal of Cognitive Research in Science, Engineering and Education (IJCRSEE), 12(1), 89–101.

https://doi.org/10.23947/2334-8496-2024-12-1-89-101

Mtar, K. & Belazreg, W. (2021). Causal Nexus Between Innovation, Financial Development, and Eco-

nomic Growth: The Case of OECD Countries. Journal of the Knowledge Economy, 12(1), 310-

https://doi.org/10.1007/s13132-020-00628-2

Muellerleile, C. (2017). Calming Speculative Traffic: An Infrastructural Theory of Financial Markets.

Economic Geography, 94(3), 279–298. https://doi.org/10.1080/00130095.2017.1307100

Odhiambo, N.M. & Musakwa, M. T. (2024). Remittance inflows and financial development in Sub-Sa-

haran African countries: Does governance matter? Heliyon, 10(5). https://doi.org/10.1016/j.he-

liyon.2024.e26953

Ofori, P. E., Kuuwill, A., & Quaye, B. (2024). Effect of human capital development and institutional

quality on inclusive growth in African countries. Cogent Economics & Finance, 12(1). https://

doi.org/10.1080/23322039.2024.2357155

Onifade, S. T., Gyamfi, B. A., Haouas, I. & Asongu, S. A. (2024). Extending the frontiers of financial

development for sustainability of the MENA states: The roles of resource abundance and insti-

tutional quality. Sustainable Development, 32, 1971–1986. https://doi.org/10.1002/sd.2751

Pagano, M., & Volpin, P. (2001). The political economy of finance. Oxford Review of Economic Policy,

(4), 502–519. https://doi.org/10.1093/oxrep/17.4.502

Popoola, O., Alege, P.O., Gershon, O. & Asaleye, J.A. (2019). Human capital channels and produc-

tivity growth: Evidence from Nigeria. Economics and Sociology, 12(4), 59-73. https://doi.

org/10.14254/2071-789X.2019/12-4/3

Romer, P. M. (1990). Human capital and growth: Theory and evidence. Carnegie-Rochester Conference

Series on Public Policy, 32, 251-286. https://doi.org/10.1016/0167-2231(90)90028-J

Rutendo Magwedere, M., & Marozva, G. (2025). Inequality and Informal Economy: The Moderating

Role of Financial Technology. Economics - Innovative and economics research journal, 13(1),

-211. https://doi.org/10.2478/eoik-2025-0004

Sabir, S. and Qamar, M. (2019). Fiscal policy, institutions and inclusive growth: evidence from the de-

veloping Asian countries. International Journal of Social Economics, 46(6), 822-837. https://

doi.org/10.1108/IJSE-08-2018-0419

Samargandi, N., Fidrmuc, J. & Ghosh, S. (2015). Is the Relationship Between Financial Development

and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries.

World Development, 68, 66-81. https://doi.org/10.1016/j.worlddev.2014.11.010

Seven, F., Uslu, M., &Guney Sahan, B. (2023). The Association Between Natural Disasters - Trade:

Literature Review. Collection of papers new economy, 1, 164-178. https://doi.org/10.61432/

CPNE0101164s

Shahbaz, M., Naeem, M., Ahad, M., Tahir, I., (2018). Is natural resource abundance a stimulus for

financial development in the USA? Resource Policy, 55, 223–232. https://doi.org/10.1016/j.

resourpol.2017.12.006

Spyromitros, E., & Panagiotidis, M. (2022). The impact of corruption on economic growth in develop-

ing countries and a comparative analysis of corruption measurement indicators. Cogent Eco-

nomics & Finance, 10(1). https://doi.org/10.1080/23322039.2022.2129368

Thomas, A., & Spataro, L. (2018). Financial literacy, human capital and stock market participation

in Europe. Journal of Family and Economic Issues, 39(4), 532-550. https://doi.org/10.1007/

s10834-018- 9576-5

Human Development, Institutional Quality, and Financial Development: Evidence from Middle-Income Countries

Topić – Pavković, B. (2024). Challenges to Global Monetary and Financial Stability. Collection of pa-

pers new economy, 2(1), 31-45. https://doi.org/10.61432/CPNE0201031t

Zaidi, S. A. H., Wei, Z., Gedikli, A., Zafar, M. W., Hou, F., & Iftikhar, Y. (2019). The impact of global-

ization, natural resources abundance, and human capital on financial development: Evidence

from thirty-one OECD countries. Resources Policy, 64, 101476. https://doi.org/10.1016/j.re-

sourpol.2019.101476

Downloads

Published

2025-09-01

How to Cite

Nguyen, T. A. N. (2025). HUMAN DEVELOPMENT, INSTITUTIONAL QUALITY, AND FINANCIAL DEVELOPMENT: EVIDENCE FROM MIDDLE-INCOME COUNTRIES. ECONOMICS - INNOVATIVE AND ECONOMICS RESEARCH JOURNAL, 13(3), 283–301. https://doi.org/10.2478/eoik-2025-0066

Issue

Vol. 13 No. 3 (2025): ECONOMICS - INNOVATIVE AND ECONOMICS RESEARCH JOURNAL

Section

Original Scientific Paper

License

Copyright (c) 2025 ECONOMICS - INNOVATIVE AND ECONOMICS RESEARCH JOURNAL

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.