Technical Efficiency and Financial Deepening in the non-OECD Economies

This contribution investigates the channels through which the relationship between financial deepening and growth materializes. While this relationship has been extensively explored over the recent past, less attention has been paid to the channels through which the relationship comes about. In continuing our exploration of this relationship, instead of using a total factor productivity measure, as the existing literature does, we model productive efficiency in a more explicit and comprehensive way using non-parametric methodologies to construct efficiency frontiers. We consider the link between financial deepening and productive efficiency in a number of non-OECD countries, using the data available from the Penn World Tables. Our results show that financial development has in general a positive effect on productive efficiency.