Page 15 - Azerbaijan State University of Economics
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Girma, Abebe Gule: The Role of Financial Development in Post-War Economic Growth
However, the effectiveness of international humanitarian aid and foreign economic
assistance depends on the quality of socio-economic policies and the size of aid
received by the country (Collier and Dollar 2002). Among key determinants of post-
war economic recovery are geographic location, natural resources, international
remittances, credibility, and effectiveness of monetary and fiscal policies (Nkurunziza
2008; Felipe et al. 2010; Polchanov, 2017).
In this paper, we focus on the role of the financial sector. We specifically examine
whether financial development accelerates economic growth in post-war countries.
Prior literature on finance shows that financial development is one of the significant
determinants of economic growth (King and Levine 1993). As Schumpeter argued,
financial services contribute to technological innovation and economic development
through mobilizing savings, accumulating, and allocating capital efficiently. Despite
the prior literature thoroughly investigating the nexus between the financial sector and
economic growth, this relationship in the context of war-torn economies, especially
during the post-war period is underexplored. We believe the effect of this relationship
will be more evident in societies experiencing the consequences of warfare. Post-war
economies suffer from the lack of sustainable economic recovery and often the risk
of renewed conflict rises if socio-economic challenges are not overcome. Moreover,
economic gains in post-war economies may not be distributed across different groups
of society which further increases civil unrest. The development of the financial sector
can provide war-torn societies with long-term productivity growth and economic
efficiency improvements for equitably growth.
Our study results show that financial development significantly and positively drives
postwar economic growth. The financial sector is an essential part of the country's
economic system, and the development of this sector is expected to contribute towards
growth and reconstruction of the post-conflict society economy. The objective of this
study was to investigate the effect of financial sector development on postwar
economic growth and explore the mechanisms of this effect through the control of
monetary and other variables.
The paper contributes to three different angles. First, it examines the effect of financial
development on fostering postwar economic growth in the recent war-torn countries.
Second, it compares the effect of financial development in three phases of periods:
the prewar period, the war period, and the postwar period. Third, since the link
between financial development and economic growth did not have single
argumentative conclusion, this study contributes by adding new evidence on the
finance development nexus economic growth relationship.
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