Financial development and economic growth under uprisings

Abstract

This paper aims to examine the causal impact of the Arab Spring and government institutions on the finance-growth nexus. The empirical analysis is implemented for extensive firm-level panel data combined with national data covering macroeconomic and institutional factors for the period 2005-2014, starting six years before and continuing after the Arab Spring. Using Difference-in-Difference (DID) method, we analyze the effect of the Arab Spring. Evidence points to financial development as a strong positive contributor to growth. The analysis also indicates that the Arab Spring dampens growth. These results seem to suggest that political instability adversely affects growth; nevertheless a well-functioning financial system is a necessary but not a sufficient condition to enhance growth. Therefore, policies aiming at improving the efficiency and the operation of institutions such as a country’s legal system, citizen’s participation in selecting government, freedom of expression and the stage of financial development should persist over an extended period of time, in order to bear fruition and achieve a significant success in boosting economic growth and reducing poverty.