This study aims to empirically determine whether economic globalization forces and the level of financial sector development significantly influence the relative global economic power of 45 leading economies in the world. To achieve this, data were compiled from reputable sources between 2002 and 2021. The Driscoll-Kraay Standard Errors (DKSE) technique was used to estimate the baseline panel regression model in the presence of parameter heterogeneity, cross-section dependence, and variable nonstationarity. The AMG estimator was also deployed as an alternative method for estimating econometric models. The empirical analysis provides evidence that financial sector development positively influences countries' relative global economic power, and that the relationship between financial sector development exhibits an inverted U-shaped structure, suggesting a non-linear relationship. Additionally, the study reveals that economic globalization hinders the economic strength of countries, undermining the comparative cost advantage, Heckscher-Ohlin trade theories, and external capital flow theory, possibly due to global trade imbalances, trade protectionism measures by countries, geoeconomic fragmentation, and distortions in the global financial system. Inflation, government expenditure, capital stock, and economic freedom are positively linked to global economic power. However, the labour force and natural resource rent have negative effects. Therefore, it is recommended that policymakers and national governments should promote robust financial deepening and liberalization, foster unhindered international trade, and remove impediments to free trade and capital flows. Additionally, leading countries should pursue effective macroeconomic management and economic freedom to enhance their global economic power and competitiveness.
Oluwafemi Josua O. Akinyemi (Mon,) studied this question.
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