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

Abstract Contrasted sharply with a large cohort of studies on financial development in developed and developing countries, research observed particularly in middle-income countries is uncommon. Accordingly, this research explores the effect of human development and institutional quality on financial development in 84 middle-income countries 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 results estimated by difference-GMM indicate that human development positively influences financial development regarding financial institutions. However, this factor negatively affects financial development 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 development in middle-income countries.