Agarwala, Ramgopal, 1983, “Price Distortions and Growth in Developing Countries,” World Bank Staff Working Paper No. 575 (Washington: World Bank).
Barro, Robert, 1991, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics, Vol. 106 (May), pp. 407-33.
Fry, Maxwell, 1978, “Money or Capital or Financial Deepening in Economic Development?” Journal of Money, Credit and Banking, Vol. 10 (November), pp. 464-75.
Fry, Maxwell, 1988, Money, Interest, and Banking in Economic Development, (Baltimore, Maryland: Johns Hopkins University Press).
Gelb, Alan H, 1989, “A Cross-Section Analysis of Financial Policies, Efficiency and Growth,” World Bank Policy, Planning, and Research Working Paper WPS 202 (Washington: World Bank).
Ghura, Dhaneshwar, and Michael Hadjimichael, 1996, “Growth in Sub-Saharan Africa,” Staff Papers, International Monetary Fund, Vol. 43 (September), pp. 605-34.
Harris, James W., 1979, “Financial Deepening as a Prerequisite to Investment Growth: Empirical Evidence from Five East Asian Economies,” Developing Economies, Vol. 17 (September), pp. 295-308.
Johnston, R. Barry, and Ceyla Pazarbasioglu, 1995, “Linkages Between Financial Variables, Financial Sector Reform and Economic Growth and Efficiency,” IMF Working Paper 95/103 (Washington: International Monetary Fund).
Khatkhate, Deena, 1988, “Assessing the Impact of Interest Rates in Less Developed Countries,” World Development, Vol. 16 (May), pp. 577-88.
King, Robert, and Ross Levine, 1993a, “Financial Intermediation and Economic Development,” in Financial Intermediation in the Construction of Europe, ed. by Colin Mayer and Xavier Vives, (London: Centre for Economic Policy Research), pp. 156-89.
King, Robert, and Ross Levine, 1993b, “Finance and Growth: Schumpeter Might Be Right,” Quarterly Journal of Economics, Vol. 108 (August), pp. 717-37.
Lanyi, Anthony, and Rusdu Saracoglu, 1983, Interest Rate Policies in Developing Countries: A Study, IMF Occasional Paper No. 22 (Washington: International Monetary Fund).
Levine, Ross, 1997, “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature, Vol. 35 (June), pp. 688-726.
Levine, Ross, and Sara Zervos, 1998, “Stock Markets, Banks, and Economic Growth,” American Economic Review, Vol. 88 (June), pp. 537-58.
McKinnon, Ronald, 1982, “The Order of Economic Liberalization: Lessons From Chile and Argentina,” Carnegie-Rochester Series on Public Policy, Vol. 17 (Autumn), pp. 159-86.
McKinnon, Ronald, 1993, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, (Baltimore, Maryland: Johns Hopkins University Press, 2nd ed.).
Mehran, Hassanali, and others , 1998, Financial Sector Development in Sub-Saharan African Countries, IMF Occasional Paper No. 169 (Washington: International Monetary Fund).
Patrick, Hugh, 1966, “Financial Development and Economic Growth in Underdeveloped Countries,” Economic Development and Cultural Change, Vol. 14 (January), pp. 174-89.
Pill, Huw, and Mahmood Pradhan, 1995, “Financial Indicators and Financial Change in Africa and Asia,” IMF Working Paper 95/123 (Washington: International Monetary Fund).
Robinson, Joan, 1952, “The Generalization of the General Theory,” in The Rate of Interest, and Other Essays (London: Macmillan), pp. 67-142.
Rother, Philipp C., 1999, “Explaining the Behavior of Financial Intermediation: Evidence from Transition Economies,” IMF Working Papers 99/36 (Washington: International Monetary Fund).
This paper could not have been written without the contributions of desk economists in the IMF’s African Department, who compiled the information on individual countries. We thank David T. Coe, Ross Levine, and Andrea Schaechter for their useful comments on an earlier version of this paper, while absolving them of responsibility for any remaining errors. The research assistance of Naly Carvalho and Ali Diallo and the editorial assistance of Thomas Walter are also gratefully acknowledged.
For a recent survey of the literature, see Levine (1997). The empirical literature on this issue is extensive, but its results—although somewhat supportive of the Goldsmith-McKinnon-Shaw paradigm—are not totally conclusive. On one hand, Fry (1978 and 1988), Harris (1979), Lanyi and Saracoglu (1983), Gelb (1989), and King and Levine (1993a and 1993b) provide results that are supportive of the financial deepening paradigm. On the other hand, empirical tests conducted by Agarwala (1983) and Khatkhate (1988), among others, have failed to lend support to it. Some economists, such as Robinson (1952), believe that causality runs from economic growth to financial deepening. Their hypothesis is that economic growth creates the conditions for the development of financial markets, which otherwise could not take place. Patrick (1966) suggests that, in the early stage of development, financial development may lead growth, but, in the later stages, growth is likely to determine the speed of financial development.
This happened even in countries where the banking system remained in private hands after independence.
A review of the status of financial sector reforms in sub-Saharan Africa is provided in Mehran and others (1998).
Johnston and Pazarbasioglu’s paper takes the approach of Barro (1991) and uses panel data for 40 countries to investigate the determinants of growth. Their results suggest that the interest cost of capital, the volume of intermediation, and the efficiency of intermediation can be separately identified as explaining economic growth. They also find that the impact of financial development on economic growth is very different in repressed and reformed financial systems, and in countries that have experienced financial crises and those that have not.
Also, most of the variables used in the numerator of the indices of financial deepening are stocks while the denominator, GDP, is a flow concept.
For those variables for which a higher figure is associated with a less desirable feature of the financial system (e.g., share of nonperforming loans), formula (1) becomes dij = [(kij - max i=1, … n kij)/(min i=1, … n kij - max i=1, … n kij)] * 100.
There is only one exception to this general approach. In the financial products index, a score of 100 can be obtained in the category of interbank markets if at least three different types of interbank markets are in existence, and 66.6 (33.3) if two (one) are (is) in place.
Data on individual attributes are available upon request from the authors.
Given the lack of data for the attributes of this index in 1987, the index computed for this year reflects only the different values assigned to the interest rate spread. Thus, the figures for 1987 turn out to be only slightly different from those for 1997 and do not allow for a proper comparison between the two years.
Cameroon, Kenya, Madagascar, Mali, Nigeria, Senegal, Swaziland, and Zimbabwe.
In Togo, the ratio of nonperforming loans to the total loan portfolio fell from 17 percent in 1994 to 5.4 percent in 1998. However, a large part of this decline was due to a rescheduling of loans. There is also a concern that individual banks may not classify their loans properly.
In calculating the financial products index, a country’s score in the category of interbank transactions was derived as follows. An average was computed for up to three areas in which the country had interbank transactions. Therefore, a country was assigned a score of 100 on this question if it had interbank transactions in at least three of the five areas.
Interestingly, Nigeria is not reported as having had interest rate controls.
The acceptance of the obligations of Article VIII signals a commitment by the member country to avoid imposing restrictions on payments and transfers for current transactions and adopting discriminatory currency arrangements and/or multiple currency practices related to current transactions.
A country that joins the Fund without accepting the obligations of Article VIII avails itself of the transitional arrangements of Article XIV. These arrangements allow a Fund member to maintain or adapt those restrictions to current transactions that were in effect at the time it became a member. The country is expected to eliminate those restrictions as soon as possible, and the introduction of new restrictions is not allowed.
None of the variables used to measure human capital (the human development index, combined primary and secondary education enrollment ratio, or literacy rate) are statistically significant.