Finance and Growth: A Schumpeterian Trip to Africa

Abstract

Extensive literature has been written about the relationship between financial development and economic growth. Schumpeterians advocate for the positive spillovers of financial services in an economy. This work tries to analyze the causality of this connection in the context of developing economies. Causality problems may arise between the economic growth and financial sector size and efficiency magnitudes. There is room for three possibilities: financial services are a source of growth, they are a consequence of it, or there is bidirectional causality. This work tries to shed light on this controversial question and finds financial sector development as a consequence rather than a source of growth for most African countries. For that purpose, a cross-sectional dataset of Sub-Saharan countries in 1994-2009 period is used and tested in a Solow-Swan augmented model with a financial sector component. Lagged and instrumental variables are also implemented in order to settle potential reversal causality problems.

Keywords: financial sector, finance, augmented model, Solow, Africa, Growth, productivity, Schumpeter

JEL Classification: O00