Relationship Financial Development and Economic Growth: An Empirical Test for MENA Countries

Abstract

This paper examines the link between economic growth and the financial system. We discuss the effect of the financial development on growth in the MENA region, while trying to know how manifests this effect and under what conditions it would be positive. And this through i) building a financial development index ii) Estimate the relationship between financial development and economic growth based on a panel of MENA countries over the period 1990-2014. The results show that the positive contribution of financial development remains dependent on the stability of the financial system. The results also confirm theoretical suggestions that instability in financial development is detrimental to the positive effect of financial development on growth. However, it should be noted that the financial development effect depends to a large extent on the structural and cyclical specificities of each country. Moreover, the results do not make it possible to determine the structure of the financial system that is best suited to the economic growth of the countries studied, a structure that the national authorities of these countries should certainly promote for a faster convergence towards potential growth. Indeed, the reforms of the financial system must follow a comprehensive and cautious approach that requires a thorough study to clear the threshold from which financial development can boost economic growth.

Keywords: Financial development, Economic growth, Panel Data, Middle East and North Africa Countries