The main objective of
this study is to explore the relationship between total factor productivity and
financial development for a group of Latin American countries consisting of
Brazil, Colombia, Costa Rica and Mexico covering the period from 1996 to 2019.
Total factor productivity, which is considered as one of the main drivers of
sustainable economic growth, especially for emerging economies, is the measure of
productive efficiency given by the ratio of aggregate output to aggregate
inputs. Financial development refers to the development of financial
institutions and financial markets. Latin American countries exhibit different
levels of both total factor productivity and financial development mainly due
to the emerging nature of their economies, which explains the motivation of
choosing four of these countries as the sample to analyze the association
between total factor productivity and financial development. Data for total
factor productivity is taken from the Penn World Table while the Financial
Development Index Database provided by the IMF is used in order to examine
financial development. The results of this study indicate that countries with
higher levels of total factor productivity also have higher levels of financial
development. This finding can be interpreted as the outcome of the fact that
there are macroeconomic and financial factors determining or similarly
influencing both total factor productivity and financial development.
Significant policy implications for emerging countries can be inferred from
this close connection between total factor productivity and financial
development, which constitutes the major contribution of this study to the literature.
