Financial development and economic growth: Role of institutional quality

Abstract

The objective of our work is to show the importance of a healthy institutional framework in the finance-growth relation. In this context, we start by presenting, a theoretical lighting on this subject while trying to define the concept of the governorship and to determine its various measurements. Then, we empirically test a model of growth of Solow increased by the human capital, treating relation between financial development, institutions and economic growth. The various estimates were made by Panel data Methods over the period of 1990 to 2006 for 22 developing countries. Following these estimates, it seems that the quality of the institutions is regarded as an important factor which must not be neglected in the study of the relation between the financial sphere and the real sphere

Interplay between financial sector and institutional framework in the economic growth process of Kenya

“…In this regards, Demetriades and Law (2006), in a panel study of 78 countries within the framework of mean group and pooled mean group estimation techniques, established that institutional quality facilitated financial development to produce stronger positive effect on economic growth. These findings were also supported by Yahyaoui and Rahmani (2009) in a similar panel study of 22 developing countries for the period 1990–2006. This further suggests that a sound institutional framework matters in influencing and moderating the impact of financial development on economic growth.…”

“…It also supports the argument that more finance without a sound institutional framework may not succeed in delivering economic growth benefits. These findings are in tandem with the research outputs of Aluko and Ibrahim (2020a), Tang et al (2020), Haini (2019), Sohag et al (2019), Slesman et al (2019), Yahyaoui and Al Saggaf (2019), Gazdar and Cherif (2015), Law et al (2013), Anwar & Cooray (2012), Law and Habibullah (2006), Yahyaoui and Rahmani (2009), and Demetriades and Law (2006) which found that finance and institution complement each other to increase the productive capacity and subsequently growth of the economy. On the contrary, it stands at variance with the studies of Olaniyi and Oladeji (2020), Olaniyi and Adedokun (2020), Berhane (2018), Williams (2017), Compton and Giedeman (2011), and Ahlin and Pang (2008) confirmed that the institutional quality leaked out the growth benefits of financial development.…”

“…Thus, an economy is better financed when strong institutions are available to ensure efficient allocation of resources to growth-enhancing activities which build up the productive capacities of the real sector (Tang et al, 2020;Gyamfi, Bokpin, Aboagye & Ackah, 2019). Following these debates, several studies have investigated the moderating role of institutions in the relationship between financial development and economic growth (Ahlin & Pang, 2008;Anwar & Cooray, 2012;Arcand, Berkes, & Panizza, 2015;Balach & Law, 2015;Berhane, 2018;Compton & Giedeman, 2011;Demetriades & Law, 2006;Effiong, 2015;Gazdar & Cherif, 2015;Kutan, Samargandi, & Sohag, 2017;Law & Habibullah, 2006;Law et al, 2013;Law et al, 2018;Rachdi & Mensi, 2012;Sghaier, 2018;Slesman et al, 2019;Williams, 2019;Yahyaoui & Rahmani, 2009), but their research outputs are mixed and inconclusive. Aside from the inconclusiveness of results, all the extant studies were carried out within the context of cross-sectional or panel data frameworks.…”

Finance-institution-growth trilogy: time-series insights from South Africa

“…However, it has been contended that allocation of resources to growth-enhancing activities requires the presence of a sound, efficient and effective institutional framework (Demetriades and Law, 2006;. Thus, institutional quality is regarded as an important transmission mechanism through which financial development (FD) effectively impacts on economic growth (Olaniyi and Oladeji, 2020;Aluko and Ibrahim, 2020a;Law et al, , 2018aMuye and Muye, 2017;Gazdar and Cherif, 2015;Yahyaoui and Rahmani, 2009;Demetriades and Law, 2006). This hinges on the assertion that strong institutions facilitate proper channelization of resources to productive activities by blocking loopholes and lapses in the financial system that might culminate in opportunistic behavior which abets the diversion of credit to growth-inhibiting activities.…”

Analysis of the Relationship between Financial Development, Employment and Institutions on Economic Growth in WAEMU Countries

“…Like the work of Acclassato and Eggoh (2012), Keho (2012) and Yahyaoui and Rahmani (2009), the results of the impact of financial development, the level of employment on economic growth in the WAEMU zone depend on the indicator in question. However, the labor force and the democracy Index have a negative influence on economic growth in the Union, while the average level of years of schooling attained, the rate of trade openness, the quality of institutions are positively correlated with economic growth.…”