Governance, Financial Development and Economic Growth in the WAEMU area: Evidence from panel ARDL analysis

Abstract

The objective of this work is to estimate the long-term effects of governance quality on financial development and the real sector growth in WAEMU zone covering the period of 1996 to 2018. To this end, we utilize the Pooled Mean Group (PMG) method to estimate a nonlinear panel through the ADRL model proposed by Pesaran et al., (1999) and Pesaran and Smith, (1995). The results show that the quality of certain governance factors determines the financial system and its capacity to accelerate growth in long run. The study demonstrates that the marginal effect of financial development on growth is about 0.69 point for a given threshold of governance quality. This outcome means that financial development affects positively growth and the governance level sustains that positive effect despite the poor quality of governance comprises between -1 and 1. Therefore, an improvement of governance quality will provide a favourable environment for financial development and consequently for economic growth. The study finally calls policy maker to more strengthen democracy and rule of law, this could offer more guarantees to banks for granting long-term credits. JEL classification numbers: C23, E44, G21. Keywords: Growth, Financial development, PMG, MG, WAEMU.