The Finance and Growth Nexus Re-Examined: Do All Countries Benefit Equally?

Employing an econometric methodology to study the linkages between finance and growth

This paper analyzes whether the impact of financial deepening on economic growth differs across regions, income levels, and types of economy. It uses a dataset of 150 countries for the period of 1975-2005 to perform the analysis and finds that finance-growth nexus is indeed heterogeneous across regions, income levels, and between oil and non-oil exporters. Heterogeneity arises primarily for the level of banking depth rather than for stock market activity. The paper also makes the following observations:

  • When the Middle East and North Africa (MENA) region is compared to Sub-Saharan Africa, outreach to borrowers is twice as large, the share of firms indicating credit as a major constraint is 20% lower, and the percentage of surveyed firms receiving bank credit is 20% greater;
  • MENA countries suffer from what is termed a ‘quality gap in banking intermediation. For the same level of depth, the growth benefits are at most two-thirds of those obtained in other regions;
  • Conditions on the supply side such as the functioning of banks and their regulatory environment are driving the weaker growth outcomes in MENA, oil exporters, and low-income countries.

About this Publication

By Barajas, A., Chami, R. & Yousefi, S.R.