nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒10‒08
six papers chosen by
Georg Man

  1. Credit Constraints and Economic Growth in a Dual Economy By Peter Skott; Leopoldo Gomez-Ramirez
  2. Financial development and total factors productivity channel: Evidence from Africa By EZZAHID, Elhadj; ELOUAOURTI, Zakaria
  3. Recession and financial development: An empirical analysis By Kodila-Tedika, Oasis; NGUENA, Christian L.
  4. Access to finance in the Western Balkans By Moder, Isabella; Bonifai, Niccolò
  5. Dynamic Openness and Finance in Africa By Simplice Asongu; Jules R. Minkoua N
  6. How does inequality affect long-run growth? By Roxana Gutiérrez-Romero

  1. By: Peter Skott (University of Massachusetts - Amherst); Leopoldo Gomez-Ramirez (Universidad del Norte, Colombia)
    Abstract: Pervasive credit constraints have been seen as major sources of slow growth in developing economies. This paper clarifies a mechanism through which an inefficient financial system can reduce productivity growth. Using a two-sector model, second, we examine the implications for employment and the distribution of income. Both classical and Keynesian versions of the model are considered; saving decisions are central in the classical version while firms’ investment and pricing decisions take center stage in the Keynesian version. We find that, although boosting the asymptotic rate of growth, a relaxation of credit constraints may reduce the share of the formal sector, increase inequality and underemployment, and have little or no effect on the medium-run rate of growth.
    Keywords: credit constraints, productivity growth, dual economy, underemployment, income distribution
    JEL: O11 O41 E2
    Date: 2017
  2. By: EZZAHID, Elhadj; ELOUAOURTI, Zakaria
    Abstract: We explore the links between financial development and economic growth through Total Factors Productivity canal in African economies. First, we use a composite index to gauge the levels of financial development in 40 African economies during the period 2004-2014. Second, we study the Finance-Total Factors Productivity (TFP) relationship in a panel of 22 economies classified by their income level. The main results of our study show that financial development in Africa promotes economic growth, improves the allocation investment, and stimulates total factors productivity, but affects negatively saving mobilization. Results by group of countries show that financial development does not promote total factors productivity in low-income and upper-middle-income countries. For low-income countries, this is due to the inadequacy of financial services available to the needs of economic agents. For the second category of countries, this result is probably due to the fact that the financial system is biased toward the formal sector, which does not make enough efforts to increase TFP. The Finance-TFP relationship is significantly positive in the lower middle-income countries. the reforms of African financial systems have to be designed and directed to increase the adequacy of financial services to the needs of each economy and its development level. Financial sectors should encourage the accumulation of inputs in factors-driven economies, improve the reallocation of resources to high-productivity sectors in efficiency-driven economies, and finance Innovation in innovation-driven economies.
    Keywords: Total Factors Productivity, financial development, financial composite index, economic growth, Africa.
    JEL: C01 G2
    Date: 2017
  3. By: Kodila-Tedika, Oasis; NGUENA, Christian L.
    Abstract: This paper mainly examine the sensitivity level of economic recession to the financial sector development by ascertaining whether such relationship is linear and contingent on trade openness, GDP per capita, financial openness, institution, democracy and fuels. We employ annual data of 129 countries from all part of the world spanning 1990-2010 and invoke Ordinary Least Squares (OLS) estimation method; we applied Sasabuchi test to verify the inverse U-shape and estimate the extreme point. We also used semiparametric and regional exclusion based regression for robustness check. The nexus between recession and financial development assessment suggest that, the nonlinearity and thus U-shaped relationship is operational; additionally, when financial development increases, it is accompanied by a reduction in the depth of recessions; and this, up to a certain threshold. Beyond this brink, financial deepening correlates with deep recessions. Additionally, we found that trade openness have a positive on economic recession independently to the estimation method. For robustness check, estimations results first confirm the baseline findings in terms of magnitude and significance in the correlation coefficients; then, highlight sub-Saharan Africa (SSA), South Asia (SASIA) and Latin America and Caribbean (LAC) as the order of continental/regional importance in increasing magnitude. Finally, the semiparametric regression show that, the results of the parametric part converge with the previous results in general, and bear out with illustration the functional form of the nonlinear relation between recession and financial development. To the best of our knowledge, this is the first study examining this relationship using newly primary and hitherto almost unexploited “Rare macroeconomic disasters” data from Barro and Ursua (2012) which allow us to build a more specific proxy of the variable “economic recession”.
    Keywords: Recession - Financial development - Macroeconomics disasters
    JEL: E32 E44 O16 O50
    Date: 2017–09–04
  4. By: Moder, Isabella; Bonifai, Niccolò
    Abstract: Limited access to finance is one of the main obstacles for firms located in the Western Balkans and hampers economic growth as well as the transmission of monetary policy. The aim of this paper is to undertake an in-depth analysis of access to finance constraints in this region, where countries as EU candidates or potential candidates have a prospect of joining the European Union. Besides touching upon macroeconomic and banking sector indicators that influence access to finance, this paper empirically assesses firm-level factors that determine whether a firm operating in the Western Balkans is credit-constrained, both in actual and perceived terms. In line with the literature, the results suggest that size, age, location, being audited, having outstanding loans and expectations about future performance matter for actual credit availability. The econometric analysis is complemented by a review of the Western Balkan countries’ Economic Reform Programmes, which indicate that financing constraints are tackled by most national authorities through specific policy measures, mostly for small and medium-sized enterprises. JEL Classification: E22, G30, O16
    Keywords: economic development, financing constraints, SMEs
    Date: 2017–09
  5. By: Simplice Asongu (Yaoundé/Cameroon); Jules R. Minkoua N (Buea, Cameroon)
    Abstract: This study assesses dynamics of openness and finance in Africa by integrating financial development dynamics of depth, activity and size in the assessment of how financial, trade, institutional, political and other openness policies (of second generation structural and institutional reforms) have affected financial development. The empirical evidence is based on Generalized Method of Moments with data from 28 African countries for the period 1996-2010. The following findings are established. (i) While the de jure (KAOPEN) indicator of financial openness improves financial depth, the de facto (FDI) measurement decreases it, with the effect of the latter measure positive on financial size. (ii) Whereas trade openness improves financial depth, its effect on financial activity and size is negative. (iii) Institutional openness has a positive effect on financial dynamics of depth and activity, while its effect on financial size is negative. (iv) Political openness and economic freedom are detrimental to financial depth and activity. Justifications for these nexuses are discussed.
    Keywords: Banking; Trade; Institutions; Politics; Africa
    JEL: E50 G20 O16 O17 O55
    Date: 2017–01
  6. By: Roxana Gutiérrez-Romero
    Abstract: This article shows that countries with higher historical levels of income inequality, dating back to the early 1800s, experienced lower rates of growth centuries after in terms of number of firms created, number of employees hired, firms’ output, value added and profit margin. To increase the understanding as the channels through which historical inequality deterred growth, the article exploits the differences across industries’ intensities in skilled labour, physical capital, dependence on external finance and written contracts across 28 sectors in 57 countries during the 1985–2010 period. It is shown that industries relatively more in need of external finance and contracts experienced lower firm creation growth in countries with higher levels of past inequality. Similarly, industries intensive in skilled labour and physical capital experienced lower rate of growth in the number of employees hired, firms’ output and real value in more unequal countries.
    Keywords: Inequality, Entrepreneurship, panel study
    JEL: O11 O47 C5
    Date: 2017–09

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