1. CREPOL WAIFEM WAMA & WAMI
The 8th Annual Conference on Regional Integration in Africa (ACRIA8) on the Topic
Money Africa
Jointly organized by
CREPOL WAIFEM WAMA & WAMI
Finance-Growth Nexus: Evidence from a dynamic panel model on ECOWAS Countries:
Lomé, July 3-4, 2017
Dr. Toussaint Houeninvo ,
African Development Bank
Regional office for Dakar, Senegal

2. Presentation Outline 1-Introduction 2- Stylized facts
3- Literature review
4- Research question
5- Methodology : data source, sampling and model specification
6- Empirical results
7- Conclusion and Policy Implications for ECOWAS 2

3. 1 – Introduction
The finance growth nexus debate dated back to Bagehot (1873) and Schumpeter (1911)=> finance promotes economic growth.
Although the relationship has been strongly researched both theoretically and empirically since then, there is still no consensus .
At one extreme finance is not even discussed by pioneers of development economics including Nobel Prize Laureates
Lucas (1988) =>Economists “badly over-stress” the role of financial factors in economic growth.
Joan Robinson (1952) argued that “where enterprise leads finance follows”
At the other extreme Nobel Laureate such as Merton Miller (1998), argued that “the idea that financial markets contribute to economic growth is a proposition too obvious for serious discussions”
Between the two extremes, Nobel Prize Laureate John Hicks (1969) and authors such as Gurley and Shaw (1955), Goldsmith (1969), McKinnon (1973)=>finance facilities growth
Finally investigation on the topic is rare in West Africa as compared to the rest of the world 3

4. 2 – Stilized facts .Positive relationship between credit to the private sector and real per capita income growth rate 4

5. 2– Stilized facts (cont..)5

6. 2–Stilized facts (cont..) .Real income per capita6

7. 2 – Stilized facts (cont..) .Savings rates7

8. 2– Stilized facts (cont..)8

9. 2– Stilized facts (cont..)9

10. 2– Stilized facts (end) 10

11. 3 – Literature review
Causal relationship between financial development and growth has been categorized into four hypothesis:
(i) the supply-leading hypothesis;
(ii) the demand-following hypothesis;
(iii) the bi-directional causality hypothesis and
(iv) the irrelevance hypothesis (perfect information and zero transaction cost)
Supply leading Studies [Levine Loayza and Beck (2000 a,b) Beck and Levine (2004); Otchere et al (2016)]
Demand or economic growth led following hypothesis[Demetriades and Hussein (1996); Thorton (1996); Arestis and Demetriades (1999)]
Bidirectional/reciprocal [Arestis and Demetriades (1999), Enisan and Olufisayo (2009), Esso (2010) ; Asghar and Hussain (2014)]. 11

12. 3 – Literature review (end)
Topic has been extensively investigated in Developed and Emerging Countries
Empirical studies include cross section, time series, panel data, firm level data analysis etc. Methodologies vary from OLS, 2LS, 3SLS, pooled cross section time series, Cointegration and VAR, GMM. Some of the studies highlighted a threshold effect
Table A1 (multicounty studies) and A2 (Country specific studies) in annex, summarize the literature highlighting Authors, period, sample the methodology , and findings
But empirical studies on African Countries in general and ECOWAS member countries in particular remain rare. 12

13. 4 – The Research question
The Main research question is to assess the impact of financial development measured by Credit to the private sector on real per capita GDP in ECOWAS region.
Subsidiary research question investigated on whether having a common monetary policy or a common currency or the legal origin (French vs British) has any differentiated and indirect effect on growth or through the channel of credit.
The paper uses those variables along with some control variables to measure the effect on economic growth in ECOWAS. 13

14. 5–Methodology: data sources, sampling and model specifications
The underlining assumptions are that credit to private sector has a positive effect on economic growth and this will be more effective with a zone of common currency
Data are from WDI (2017)
We used a dynamic panel model on the fifteen ECOWAS Countries over the period (55 years) applying Generalized Method of Moments (GMM) as econometric approach .
Advantages of panel data: more informative data, more exploitation of time series and cross-section variation, more control for heterogeneity, less collinearity, more degrees of freedom and more efficiency
Advantage of GMM system: deals with biases associated with simultaneity, endogeneity and lags of dependent variable and provide more efficient estimators 14

15. 5 – Methodology: data sources, sampling and model specifications (cont
Based on the literature and research question, the corresponding econometrics of finance and Growth model in a dynamic panel can be written as follows:
Which can be rewritten as
Where is the growth rate of real income per capita
is the real GDP per capita of country i in period t
stands for financial development variable (credit to the private sector)
measures the effect of financial development on growth, the main focus of the paper
measures the interaction terms (Interact) between financial development and each of the two sub-regional grouping (WAEMU and non WAEMU Countries) 11 15

16. 5 – Methodology: data sources, sampling and model specifications (cont
stands for a set of control variables other than the financial development , the lagged real GDP per capita and the sub-regional dummy
These control variables include, Foreign Direct Investment (FDI), Trade openness (OPEN) Government Expenditure (GEXP), Inflation (INF), School enrollment (SCH
which measures the effect of lagged income (or initial income in some cases) tests the convergence hypothesis
stands for unobserved country specific time-invariant variable
is the error term, a white noise error with mean zero
All variables except the dummy are computed as the logarithm of their mean values over each 5-year period with the exception of the DUMMY variable. Inflation has been introduced as Log (1+inflation)
Hansen J test and Allermo-Bond second order autocorrelation test have been performed to validate the model, 16

17. 6 – Empirical Results 17

18. 6 – Empirical Results (end)
10% increase in credit to the private sector in % of GDP leads to 5 to 5.3% increase in real income per capita in ECOWAS member countries
The common monetary policy, common currency or legal origin (French vs British) seems to have no specific effect on growth through the credit 18

19. 7– Conclusion and policy implications
These results call for some policy recommendations
Accelerate ongoing Credit Bureau Reforms (CBR) launched by the Central Bank of WAEMU Countries that aimed at reducing information asymmetry in other to boost credit to the private sector and economic growth .
Launch similar reforms at ECOWAS level with opportunity to synchronize WAEMU CBR with non WAEMU Countries as some of them have already started individual experiences. This can strongly contribute to increase real GDP per capital and then leads to greater middle class in ECOWAS
With the recent decision of Heads of States of ECOWAS to postpone the Common currency schedule from 2020 to 2027, CBR needed to be conducted in parallel with other business enabling, otherwise, the target of the common currency in ECOWAS will not have any impact on the growth and the welfare of ECOWAS people 19

20. Thank you 20