Triple vectorial analysis of financial development impact on economic growth: evidence from the Middle East and Central Asia

Abstract

Purpose This paper provides a state-of-the-art review of the financial development in the Middle East and Central Asia (MECA) and examines its impact on its economic growth.

Design/methodology/approach The authors use a Panel Data Regression Analysis on a sample of 21 countries in MECA for the period 2008–2018.

Findings Using the financial development indices and subindices retrieved from IMF, the study finds that the whole region has a below average index compared to other developing regions. However, this hides a great deal of variation across MECA countries. Surprisingly, financial development does not necessarily contribute to economic growth. It seems that some developing countries are still not predisposed to benefit from financial development due to several obstacles.

Practical implications The authors recommend policymakers and regulators in MECA to promote financial stability and keep inflation in check so that economic agents can reap the fruits of financial development and foster economic growth. Policymakers should also stimulate competition in the financial sector, build skillful human capital, attract foreign direct investments, strengthen supervision and forensic audit and more importantly reinforce the independence of central banks.

Originality/value The authors mitigate the shortcomings of single indicators as proxies for financial development by using the IMF Financial Development index that captures the depth, access and efficiency of both financial institutions and financial markets. The authors employ lower-middle-, upper-middle and high-income country groups to test the magnitude of income level on the relationship between financial development and economic growth.