Is financial development pro-poor or pro-rich? Empirical evidence from Tanzania

Nicholas Odhiambo

Journal of Development Effectiveness, 2013, vol. 5, issue 4, 489-500

Abstract: This paper examines the dynamic causal relationship between financial development and poverty reduction in Tanzania. The study attempts to answer one critical question: does financial development Granger-cause poverty reduction in Tanzania? In other words, does the financial development that has been experienced in Tanzania - ever since the onset of financial reforms in the 1990s - trickle down to the poor? Unlike some previous studies, we employ the recently developed autoregressive distributed lag (ARDL)-bounds testing approach to examine this linkage. In addition, we incorporate savings as an intermittent variable between financial development and poverty reduction in a trivariate setting. Our results show that there is an overwhelming long-run unidirectional causal flow from financial development to poverty reduction in Tanzania. This finding has important policy implications, as it shows that financial development trickles down to the poor in Tanzania.

Date: 2013
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DOI: 10.1080/19439342.2013.866154

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