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

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.