Academic journal article European Journal of Sustainable Development

Financial Development and Economic Growth in Sub-Saharan Africa: A Dynamic Panel Data Analysis

Academic journal article European Journal of Sustainable Development

Financial Development and Economic Growth in Sub-Saharan Africa: A Dynamic Panel Data Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

According to Shaw (1973), financial development is the accumulation of financial assets at a more rapid rate than the accumulation of non-financial assets. For Levine (2005), financial development occurs when financial instruments financiers, markets and financial intermediaries reduce, without necessarily eliminating them, the costs of obtaining information, the costs of executing contracts and the costs of transaction, and as a consequence, do a better job by offering financial functions. Economic growth is the evolution of Gross Domestic Product (GDP) in the short, medium and long term. It is the result of an increase in value-added produced by all the firms operating within a country. GDP is an aggregated value which takes account of all the value-added of all the firms operating on the national territory. The increase in the value-added during a given period means that the global wealth of a nation is rising. This manifests itself in the growth of per capita income and in a higher level of well-being.

In modern societies, economic growth is a considerable stake, and this was not the case in the old days. Political power takes this into consideration, for it conditions the living standards of the citizens. From the economic thought point of view, the last decades have been masked by a significant advance over the of the relationship between financial development and the real economic sphere. Two currents of thought come to intervene: the first show the positive impact of the development of the banking sector and of the financial market on economic growth, while the second exactly develops the opposite idea. The actions of opening and of stimulating the financial system and the banking system are at the origin of the financial instability and of the transmission (multiplication) of the banking crises which have manifested themselves by a degradation of economic growth which is due to the importance of the costs envisaged.

The potential positive impact of financial development on economic growth was originally analyzed by the authors of the financial repression school, that is to say McKinnon (1973) and Shaw (1973), and by other authors from the liberal school, notably Keynes (1936,1937) and Hicks(1969). The latter have shown that an efficient, dynamic and modernized financial system is at the origin (or is a source) of capital accumulation, and of the stimulation of investment, and hence of economic development.

The harmful (unfavourable) impact of financial development (banking system and financial market) on economic growth was targeted starting from the recent banking and financial in the context of a financial liberalization policy.

On the one hand, according to Soltani et al. (2014), the robustness of the information asymmetry which characterizes financial markets, may be at the origin of a failure in the coordination of the allocation of savings to investment. This asymmetry of information may deform the anticipations of investors who prefer to invest in a less risky environment than in an environment which is uncertain and riskier. They do this by taking account of the degree of aversion to risk of investors, of the imperfection of financial markets and of the high level of transaction costs. These difficulties of the financial market and this ineffective intermediation can only slowdown economic growth.

On the other hand, from the point of view of facts, the recent crises of banking insolvency have thrown the economies into recessionary periods. This experience has given us an example of the negative impact of banking sector development on macroeconomic performance. These banking problems may transform themselves into banking or financial crises that may lead to enormous costs to the whole economy.

If from the theoretical point of view, the positive relationship between financial development and economic growth is beyond any doubt, some points however remain object of a debate: the controversy on the direction of causality and the structure of the financial system which favour growth better. …

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