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Financial development and total factors productivity channel: Evidence from Africa

Elhadj Ezzahid and Zakaria Elouaourti

MPRA Paper from University Library of Munich, Germany

Abstract: We explore the links between financial development and economic growth through Total Factors Productivity canal in African economies. First, we use a composite index to gauge the levels of financial development in 40 African economies during the period 2004-2014. Second, we study the Finance-Total Factors Productivity (TFP) relationship in a panel of 22 economies classified by their income level. The main results of our study show that financial development in Africa promotes economic growth, improves the allocation investment, and stimulates total factors productivity, but affects negatively saving mobilization. Results by group of countries show that financial development does not promote total factors productivity in low-income and upper-middle-income countries. For low-income countries, this is due to the inadequacy of financial services available to the needs of economic agents. For the second category of countries, this result is probably due to the fact that the financial system is biased toward the formal sector, which does not make enough efforts to increase TFP. The Finance-TFP relationship is significantly positive in the lower middle-income countries. the reforms of African financial systems have to be designed and directed to increase the adequacy of financial services to the needs of each economy and its development level. Financial sectors should encourage the accumulation of inputs in factors-driven economies, improve the reallocation of resources to high-productivity sectors in efficiency-driven economies, and finance Innovation in innovation-driven economies.

Keywords: Total Factors Productivity; financial development; financial composite index; economic growth; Africa. (search for similar items in EconPapers)
JEL-codes: C01 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-eff and nep-fdg
Date: 2017
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Handle: RePEc:pra:mprapa:81764